<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1998
REGISTRATION NO. 333-45619
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 3674 33-0480482
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(714) 450-8700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HENRY T. NICHOLAS, III, PH.D.
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BROADCOM CORPORATION
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(714) 450-8700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
BRUCE R. HALLETT, ESQ. LARRY W. SONSINI, ESQ.
ELLEN S. BANCROFT, ESQ. JAMES N. STRAWBRIDGE, ESQ.
LEE J. LESLIE, ESQ. JOSE F. MACIAS, ESQ.
BROBECK PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
4675 MACARTHUR COURT, SUITE 1000 PROFESSIONAL CORPORATION
NEWPORT BEACH, CALIFORNIA 92660 650 PAGE MILL ROAD
(714) 752-7535 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ----------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) 4,025,000 shares
of Class A Common Stock offered by the Company and the Selling Shareholders
pursuant to an underwritten public offering, including 525,000 shares issuable
upon exercise of the Underwriters' over-allotment option (the "Public
Offering"), and (ii) 500,000 shares of Class A Common Stock offered to Cisco
Systems, Inc. by the Company in a concurrent offering that is not underwritten
(the "Cisco Offering"). Therefore, this Registration Statement contains two
forms of prospectus: one to be used in connection with the Public Offering (the
"Public Offering Prospectus") and the other to be used in connection with the
concurrent Cisco Offering (the "Cisco Prospectus"). The Public Offering
Prospectus and the Cisco Prospectus are identical in all respects except for the
front cover pages, the tables of contents, the descriptions of the plan of
distribution and the descriptions of legal matters. These sections of the Cisco
Prospectus are included herein after the final page of the Public Offering
Prospectus and are labeled "Alternate Page for Cisco Prospectus" and "Alternate
Sections for Cisco Prospectus." Final forms of each prospectus will be filed
with the Securities and Exchange Commission under Rule 424(b).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued March 23, 1998
3,500,000 Shares
[BROADCOM LOGO]
CLASS A COMMON STOCK
------------------------
OF THE 3,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 2,750,000 SHARES
ARE BEING SOLD BY THE COMPANY AND 750,000 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY HAS TWO CLASSES OF COMMON STOCK: CLASS A COMMON STOCK AND CLASS B
COMMON STOCK (COLLECTIVELY, THE "COMMON STOCK"). THE SHARES OF COMMON STOCK ARE
SUBSTANTIALLY IDENTICAL EXCEPT THAT THE HOLDERS OF CLASS A COMMON STOCK ARE
ENTITLED TO ONE VOTE PER SHARE, AND THE HOLDERS OF CLASS B COMMON STOCK ARE
ENTITLED TO TEN VOTES PER SHARE, ON MATTERS SUBMITTED TO A VOTE OF THE
SHAREHOLDERS. EACH SHARE OF CLASS B COMMON STOCK IS CONVERTIBLE AT THE OPTION OF
THE HOLDER INTO ONE SHARE OF CLASS A COMMON STOCK, AND GENERALLY WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A COMMON STOCK UPON TRANSFER OF
THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER. SEE "DESCRIPTION OF CAPITAL
STOCK." PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $10 AND $12 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE. THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY HAVE BEEN APPROVED FOR
QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "BRCM."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company and certain Selling Shareholders have granted the
Underwriters an option, exercisable within 30 days from the date hereof,
to purchase up to an aggregate of 525,000 additional Shares at the price
to public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, proceeds to Company and proceeds to Selling Shareholders
will be $ , $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
, 1998
<PAGE> 4
[Color work: Broadcom logo in the center of the page surrounded by five boxes
labeled "High-Speed Networking," "Cable Modems," "DBS/MMDS HDTV," "xDSL" and
"Cable Set-Top Boxes." Caption at bottom of the page reads "Silicon Solutions
For Broadband Communications."]
INSIDE GATEFOLD
[Color work: Broadcom logo appears in the upper left hand corner of the page,
next to a caption that reads "Silicon Solutions for Broadband Communications."]
[A structure labeled "Enterprise Communications" appears on the left side of the
gatefold and contains graphics showing switches, a repeater/hub and an
enterprise router. A structure labeled "Network Service Providers" appears in
the center of the gatefold and includes graphics labeled "Satellite,"
"Terrestrial Digital Broadcast," "Telco Twisted Pair" and "Coax Cable" leading
to a house labeled "Residential Communications." The house contains different
rooms which identify devices labeled "Cable Set-Top Box," "DBS Set-Top Box,"
"VDSL Set-Top Box," "HDTV," "Cable Modem" and "ADSL Modem."] [The following
paragraphs are located in the bottom part of the gatefold under the caption
"Products requiring broadband solutions:"
High-Speed Networking is critical to easing the communications
bottlenecks in enterprise networks. Fast Ethernet (100Mbps) and Gigabit
Ethernet (1000 Mbps) are being introduced to replace older Ethernet (10
Mbps) and Token Ring (16Mbps) technologies.
Cable Set-Top Boxes facilitate high-speed digital communications between
a subscriber's television and the cable network, permitting delivery of
several hundred MPEG-compressed digital channels and TV-based web
content.
Cable Modems connect PCs to the cable network and provide Internet
access at speeds that are up to 1000 times faster than today's fastest
analog modems.
Direct Broadcast Satellite (DBS) and Terrestrial Digital Broadcast
technologies broadcast digital video and data over high-bandwidth
satellites and microwave links directly to set-top boxes in the home.
xDSL represents a family of broadband technologies, which operate over
the existing copper twisted pair wiring in telephone local loops
providing data and video services.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITERS."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Broadcom Corporation (the "Company" or "Broadcom") is a leading developer of
highly integrated silicon solutions that enable broadband digital data
transmission to the home and within the business enterprise. The Company's
products enable the high-speed transmission of data over existing communications
infrastructures, most of which were not originally intended for digital data
transmission. Using proprietary technologies and advanced design methodologies,
the Company has designed and developed integrated circuits for some of the most
significant broadband communications markets, including the markets for cable
set-top boxes, cable modems, high-speed networking, direct broadcast satellite
and terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing circuits that implement complex communications algorithms, surrounded
by precision high-speed analog-to-digital and digital-to-analog converter
circuits. The Company's products integrate comprehensive systems solutions into
single chips or chip-sets, thereby eliminating costly external components,
reducing board space, simplifying the customer's manufacturing process, lowering
the customer's system costs and enabling higher performance. Customers currently
shipping broadband communications equipment incorporating the Company's products
include 3Com, Bay Networks, Cisco Systems, General Instrument (formerly known as
NextLevel Systems), Motorola and Scientific-Atlanta.
The Company was incorporated in California in August 1991. The Company's
executive offices are located at 16251 Laguna Canyon Road, Irvine, California
92618, and its telephone number is (714) 450-8700.
THE OFFERING
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<S> <C>
Class A Common Stock offered........................... 3,500,000 shares, including 2,750,000 shares by the
Company and 750,000 shares by the Selling Shareholders
Common Stock to be outstanding after this
offering(1)(2):
Class A Common Stock (one vote per share)............ 4,000,000 shares
Class B Common Stock (ten votes per share)........... 39,205,077 shares
Total.............................................. 43,205,077 shares
Use of proceeds........................................ General corporate purposes, including working capital,
acquisition of capital equipment and repayment of debt.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol................. BRCM
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $1,138 $3,636 $6,107 $21,370 $36,955
Gross profit................................................ 1,138 2,929 4,709 13,510 22,029
Total operating expense..................................... 1,127 2,690 4,822 9,208 24,267
Income (loss) from operations............................... 11 239 (113) 4,302 (2,238)
Net income (loss)........................................... 12 237 4 3,016 (1,173)
Diluted earnings (loss) per share(3)........................ $ .00 $ .01 $ .00 $ .09 $ (.04)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $22,116 $51,964
Total assets................................................ 45,244 75,092
Total debt.................................................. 2,693 193
Total shareholders' equity.................................. 33,392 65,740
</TABLE>
- ------------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 6,478,940 shares of Class B Common Stock issuable upon the exercise of
options outstanding as of March 18, 1998 at a weighted average exercise
price of $3.57 per share and (ii) 10,305,149 shares of Common Stock
available for issuance under the Company's employee benefit plans. See
"Management -- Employee Benefit Plans," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.
(2) Includes 500,000 shares of Class A Common Stock to be sold by the Company to
Cisco Systems, Inc. ("Cisco Systems") concurrent with this offering pursuant
to the exercise of Cisco Systems' option to purchase Common Stock at a price
per share equal to the initial public offering price, net of underwriting
discounts and commissions.
(3) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
(4) Adjusted to reflect the sale of (i) 2,750,000 shares of Class A Common Stock
offered by the Company hereby at an assumed initial public offering price of
$11.00 per share and the application of the net proceeds therefrom and (ii)
500,000 shares of Class A Common Stock to Cisco Systems by the Company
concurrent with this offering pursuant to the exercise of Cisco Systems'
option to purchase Common Stock at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. See
"Sale of Shares to Cisco Systems," "Use of Proceeds" and "Capitalization."
3
<PAGE> 6
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 3
Risk Factors........................... 5
Sale of Shares to Cisco Systems........ 16
Use of Proceeds........................ 16
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 26
</TABLE>
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<CAPTION>
PAGE
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<S> <C>
Management............................. 44
Certain Transactions................... 54
Principal and Selling Shareholders..... 56
Description of Capital Stock........... 57
Shares Eligible for Future Sale........ 60
Underwriters........................... 62
Legal Matters.......................... 63
Experts................................ 64
Additional Information................. 64
Glossary of Technical Terms............ 65
Index to Financial Statements.......... F-1
</TABLE>
------------------------
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first three
quarters of each year.
------------------------
Broadcom and QAMLink are registered trademarks of the Company. This
Prospectus also includes trademarks of companies other than the Company.
------------------------
Except as otherwise noted herein, information in this Prospectus assumes
(i) the conversion of all outstanding shares of convertible Preferred Stock into
an aggregate of 8,453,517 shares of Class B Common Stock upon consummation of
this offering, (ii) the recapitalization of the Company on March 9, 1998 to
effect the conversion into Class B Common Stock of all shares of the Company's
common stock issued and outstanding or reserved for issuance on March 9, 1998,
(iii) no exercise of outstanding options to purchase shares of Class B Common
Stock, of which options to purchase 6,478,940 shares were outstanding at March
18, 1998, (iv) the three-for-two stock split of the Company's Class B Common
Stock effected on March 9, 1998 and (v) no exercise of the Underwriters'
over-allotment option.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Class
A Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. The factors that may cause such a difference include, but are not
limited to, those discussed below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Fluctuations in Results of Operations. The Company's quarterly results of
operations have fluctuated significantly in the past and may continue to
fluctuate in the future based on a number of factors, many of which are not in
the Company's control. Among other things, the Company's results of operations
have fluctuated in the past due to competitive pressures on selling prices; the
volume of product sales; the timing and cancellation of significant customer
orders; lengthy sales cycles; pricing concessions on volume sales; fluctuations
in manufacturing yields; changes in product and customer mix; intellectual
property disputes; the Company's ability to develop, introduce and market new
products and technologies on a timely basis; introduction of products and
technologies by the Company's competitors; market acceptance of the Company's
and its customers' products; and the amount and timing of recognition of
development revenue. The Company's results of operations may also fluctuate in
the future due to a number of factors, including, but not limited to, those
listed above as well as general business conditions in the semiconductor
industry and the broadband communications markets; availability of foundry
capacity and raw materials; the quality of the Company's products; the timing of
investments in research and development; the Company's ability to expand and
implement its sales and marketing programs; the level of orders received that
can be shipped in a quarter; currency fluctuations; and general economic
conditions. The Company intends to increase its operating expenses significantly
in 1998. Because a large portion of the Company's operating expense, including
rent, salaries and capital lease expenses, is fixed and difficult to reduce or
modify, if total revenue does not meet the Company's expectations, the material
adverse effect of any revenue shortfall will be magnified by the fixed nature of
these operating expenses. Based on the foregoing or other factors, it is
possible that in some future periods the Company's reported or anticipated
operating results will fail to meet or exceed the expectations of analysts or
investors. In such event, the price of the Company's Class A Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Rapid Technological Change; Dependence on Emerging Markets. The
semiconductor industry and the broadband communications markets are
characterized by rapidly changing technology, frequent new product introductions
and evolving industry standards. Substantially all of the Company's current
product revenue is derived from sales of products for the cable set-top box,
cable modem and high-speed networking markets. These markets are characterized
by intense competition, rapid technological change and short product life
cycles. In particular, the cable set-top box, cable modem and high-speed
networking markets continue to undergo a period of rapid growth and
consolidation. The Company's business, financial condition and results of
operations would be materially and adversely affected in the event of a
significant slowdown in these or other broadband communications markets. The
Company's success will depend on the ability of its customers to develop new
products and enhance existing products for the broadband communications markets
and to successfully introduce and promote such products. There can be no
assurance that the broadband communications markets will develop as expected by
the Company. The failure of new markets to develop or the failure of the
products in these markets to gain widespread acceptance could have a material
adverse effect on the Company's business, financial condition and results of
operations. Products for broadband communications applications are generally
based on industry standards, which are continually evolving. The emergence of
new industry standards could render products of the Company or its customers
unmarketable or obsolete and may require the Company to incur substantial
unanticipated costs to comply with any such new standards. Moreover, the
Company's past sales and profitability have resulted, to a significant extent,
from its ability to anticipate changes in technology and industry standards and
to develop and introduce new and enhanced products. The Company's continued
ability to adapt to such changes and anticipate future standards will be a
significant factor in maintaining or improving its competitive position and its
prospects for growth. The
5
<PAGE> 8
Company has in the past invested substantial resources in emerging technologies,
such as 100Base-T4 for high-speed networking, for which the market did not
ultimately meet the Company's expectations. There can be no assurance that the
Company will be able to anticipate the evolving standards in the semiconductor
industry and, in particular, the broadband communications markets, or that the
Company will be able to successfully develop and introduce new products into
such markets. The failure of the Company to anticipate technological change and
introduce new products that achieve market acceptance could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business--Markets" and "--Core Technologies."
Dependence on Development of New Products. The Company's future success
will depend upon its ability to develop new silicon solutions for existing and
new markets, introduce such products in a timely and cost-effective manner and
have such products selected for design into new products of leading equipment
manufacturers ("design wins"). The development of these new devices is highly
complex, and from time to time the Company has experienced delays in completing
the development and introduction of new products. Successful product development
and introduction depends on a number of factors, including, among other things,
accurate prediction of market requirements and evolving standards, accurate new
product definition, timely completion and introduction of new product designs,
availability of foundry capacity, achievement of high manufacturing yields and
market acceptance of the Company's and its customers' products. Furthermore,
there can be no assurance that the Company will be able to introduce new
products in a timely and cost-effective manner or in sufficient quantities to
meet customer demand or that such products will satisfy customer requirements or
achieve market acceptance. In particular, the Company's current MPEG chip is
presently produced on an interim basis by another manufacturer. The Company is
currently redesigning this chip to be manufactured at its outside foundries. The
Company has licensed the MPEG technology from General Instrument and expects to
introduce the next generation of this chip during the first half of 1998. If the
Company is not able to launch this product successfully, the Company could lose
significant sales to one of its key customers, and the Company's business,
financial condition and results of operations could be materially and adversely
affected. The Company's or its customers' failure to develop and introduce new
products successfully and in a timely manner would materially and adversely
affect the Company's business, financial condition and results of operations.
See "Business--Strategy."
The Company's new products are generally incorporated into customers'
products or systems at the design stage. Achieving a design win often requires
significant expenditures by the Company without any assurance of success.
Moreover, design wins frequently precede the generation of volume sales, if any,
by six months or more. The value of any design win largely depends upon the
commercial success of the customer's product and on the extent to which the
design of the customer's electronic system accommodates components manufactured
by the Company's competitors. There can be no assurance that the Company will
continue to achieve design wins or that the products for which the Company
achieves design wins will be commercially successful. See "Business--Strategy,"
"--Customers and Strategic Relationships," "--Products" and "--Research and
Development."
Customer Concentration. A relatively small number of customers has
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to General Instrument and 3Com (including sales to their
respective manufacturing subcontractors) accounted for approximately 31.9% and
14.6%, respectively, of the Company's total revenue in 1997 and approximately
25.2% and 24.9%, respectively, of the Company's total revenue in the fourth
quarter of 1997. Moreover, sales to the Company's five largest customers
(including sales to their respective manufacturing subcontractors) represented
approximately 61.7% and 71.5% of the Company's total revenue in 1997 and the
fourth quarter of 1997, respectively. Accordingly, the Company's future results
of operations will continue to be substantially dependent on the success of its
largest customers. Any reduction or delay in sales of the Company's products to
one or more of these key customers could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will retain its largest customers or that it will
be able to recruit additional key customers. The loss of one or more of the
Company's largest customers or the inability of the Company to successfully
develop
6
<PAGE> 9
relationships with additional key customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Most of the Company's customers can cease incorporating the Company's
products in their own products with limited notice to the Company and with
little or no penalty. The Company's agreements with its customers typically do
not require minimum purchases. In addition, certain of the Company's customers
offer or may offer products (designed by themselves or third parties) that
compete with those offered by the Company. Many of the Company's customers have
pre-existing relationships with current or potential competitors of the Company,
which may affect such customers' purchasing decisions. In addition, the
Company's longstanding relationship with certain of its larger customers may
affect the purchasing decisions of other potential customers who compete with
these customers. The Company's customers face intense competition from other
manufacturers that do not use the Company's products. Further, some of the
Company's customers have "most favored nation" pricing arrangements, which could
materially adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Customers and Strategic
Relationships."
Dependence On Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel and on its ability to continue to attract,
retain and motivate qualified personnel, particularly experienced mixed-signal
circuit designers and systems applications engineers. The competition for such
employees is intense. The loss of the services of one or more of the Company's
key employees or the Company's failure to attract, retain and motivate qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. In particular, the loss of the
services of Dr. Henry Nicholas, the Co-Chairman, President and Chief Executive
Officer, or Dr. Henry Samueli, the Co-Chairman, Vice President of Engineering
and Chief Technical Officer, could materially and adversely affect the Company.
The Company has obtained $2.5 million key man life insurance policies covering
each of Dr. Nicholas and Dr. Samueli, the proceeds of which would be payable to
the Company in the event of death of either of such officers. There are no
employment contracts with any of the Company's employees. See
"Business--Employees" and "Management--Executive Officers and Directors."
Dependence on Independent Foundries. The Company does not own or operate a
fabrication facility, and substantially all of its semiconductor device
requirements are currently supplied by two outside foundries, Taiwan
Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and Chartered
Semiconductor Manufacturing ("Chartered") in Singapore. There are significant
risks associated with the Company's reliance on outside foundries, including the
lack of ensured wafer supply, limited control over delivery schedules, quality
assurance, manufacturing yields and production costs, and the unavailability of
or delays in obtaining access to key process technologies. In addition, the
manufacture of integrated circuits ("ICs") is a highly complex and
technologically demanding process. Although the Company works closely with its
foundries to minimize the likelihood of reduced manufacturing yields, the
Company's foundries have from time to time experienced lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.
The Company provides its foundries with rolling forecasts of its production
requirements; however, the ability of each foundry to provide semiconductor
devices to the Company is limited by the foundry's available capacity. Although
the Company has entered into contractual commitments to supply specified levels
of products to certain of its customers, the Company does not have a long-term
volume purchase agreement or a guaranteed level of production capacity with any
of its existing foundries because the Company believes excess foundry capacity
is currently available. The Company places its orders on a purchase order basis,
and these foundries may allocate capacity to the production of other companies'
products while reducing deliveries to the Company on short notice. In
particular, foundry customers that are larger and better financed than the
Company or that have long-term agreements with the Company's foundries may cause
such foundries to reallocate capacity in a manner adverse to the Company. In
addition, if the Company chooses to use a new foundry, several months are
typically required to complete the qualification process before the Company can
begin shipping the new foundry's products. Although the Company currently
utilizes two independent
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foundries, most of the Company's components are not manufactured at both
foundries at any given time. Any inability of one of the foundries to provide
the necessary components could result in significant delays and could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of a disruption, the Company may not be able
to qualify alternative manufacturing sources for existing or new products in a
timely manner. Even the Company's current outside foundries would need to have
certain manufacturing processes qualified in the event of disruption at another
foundry, which the Company may not be able to accomplish in a timely enough
manner to prevent an interruption in supply of the affected products. There can
be no assurance that any such sources would be able to produce ICs with
acceptable manufacturing yields. Furthermore, there can be no assurance that the
Company's foundries will continue to deliver sufficient quantities of
semiconductor devices on a timely basis, will not experience lower than expected
manufacturing yields in the future, or will continue to have excess capacity,
any of which could materially and adversely affect the Company's business,
financial condition and results of operations. See "Business--Manufacturing."
Limited Operating History. The Company was incorporated in August 1991 but
did not begin shipping products until 1994. Accordingly, the Company has a
limited operating history upon which investors may evaluate the Company and its
prospects. The Company's recent revenue growth may not be sustainable and should
not be considered indicative of future revenue growth, if any. There can be no
assurance that the Company will be profitable in any future period. The
Company's prospects must be considered in light of the risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the semiconductor industry and the broadband
communications markets. To address these risks, the Company must, among other
things, successfully increase the scope of its operations, respond to
competitive and technological developments, continue to attract, retain and
motivate qualified personnel and continue to commercialize products
incorporating innovative technologies. There can be no assurance that the
Company will be successful in addressing these risks and challenges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Third-Party Subcontractors for Assembly and
Test. Substantially all of the Company's products are assembled and tested by
one of two third-party subcontractors, ASAT Ltd. ("ASAT") in Hong Kong and ST
Assembly Test Services ("STATS") in Singapore. The Company does not have
long-term agreements with either of these suppliers and typically procures
services from such suppliers on a per order basis. As a result of this reliance
on third-party subcontractors for assembly and testing of its products, the
Company cannot directly control product delivery schedules, which could lead to
product shortages or quality assurance problems that could increase the costs of
manufacture, assembly or testing of the Company's products. Due to the amount of
time normally required to qualify assemblers and testers, if the Company is
required to find alternative manufacturing assemblers or testers of its
components, shipments could be delayed. Any problems associated with the
delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."
Reliance on Strategic Relationships. The Company has relied on in the past,
and intends to continue to form in the future, strategic relationships with
certain of its customers who are technology leaders in the Company's target
markets. These relationships often involve the proposed development by the
Company of new products involving significant technological challenges. Since
the proposed product under development may offer potential competitive
advantages to the strategic partner, considerable pressure is frequently placed
on the limited resources of the Company to meet development schedules. While an
essential element of the Company's strategy involves establishing such
relationships, these projects utilize substantial amounts of the Company's
limited resources, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between the Company and its strategic partners. Moreover, there can
be no assurance that customers of the Company will not develop their own
solutions for products currently supplied by the Company, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations. See "Business--Customers and Strategic Relationships."
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<PAGE> 11
Risks Associated with Intellectual Property Protection. The Company's
success and future revenue growth will depend, in part, on its ability to
protect its intellectual property. The Company relies primarily on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect its proprietary technologies and processes. There
can be no assurance that such measures will provide meaningful protection for
the Company's proprietary technologies and processes. The Company has been
issued two United States patents and has filed nine United States patent
applications. There can be no assurance that any patent will issue as a result
of these applications or future applications or, if issued, that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide meaningful protection to the Company. The failure of any patents
to provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. The Company also generally
enters into confidentiality agreements with its employees and strategic
partners, and generally controls access to and distribution of its documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products,
services or technology without authorization, develop similar technology
independently or design around the Company's patents. In addition, effective
copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries. Certain of the Company's customers have entered
into agreements with the Company pursuant to which such customers have the right
to use the Company's proprietary technology in the event the Company defaults in
its contractual obligations, including product supply obligations, and fails to
cure the default within a specified period of time. Moreover, the Company often
incorporates the intellectual property of its strategic customers into its
designs, and the Company has certain obligations with respect to the non-use and
non-disclosure of such intellectual property. There can be no assurance that the
steps taken by the Company to prevent misappropriation or infringement of the
intellectual property of the Company or its customers will be successful.
Moreover, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of proprietary rights of others, including its
customers. Such litigation could result in substantial costs and diversion of
the Company's resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection of and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement of other parties' proprietary rights. The Company has received a
letter from counsel for BroadCom, Inc. asserting rights in the "Broadcom"
trademark and demanding that the Company cease and desist from any further use
of the Broadcom name. The Company has responded to such counsel in a letter
asserting ownership of a valid registered trademark for the Broadcom name and
requesting further information. In addition, the Company is currently involved
in litigation with Stanford Telecommunications, Inc. ("STI") concerning the
alleged infringement of one of STI's patents by one of the Company's modem
products. There can be no assurance that the Company will prevail in this
action, or that other actions alleging infringement by the Company of
third-party patents or invalidity of the patents held by the Company will not be
asserted or prosecuted against the Company, or that any assertions of
infringement or prosecutions seeking to establish the invalidity of Company-held
patents will not materially and adversely affect the Company's business,
financial condition and results of operations. For example, in a patent or trade
secret action, an injunction could issue against the Company requiring that the
Company withdraw certain products from the market or necessitating that certain
products offered for sale or under development be redesigned; the Company has
also entered into certain indemnification obligations in favor of its customers
and strategic partners that could be triggered upon an allegation or finding of
the Company's infringement of other parties' proprietary rights. Irrespective of
the validity or successful assertion of such claims, the Company would likely
incur significant costs and diversion of its resources with respect to the
defense of such claims, which could also have a material adverse effect on the
Company's business, financial condition and results of operations. If any claims
or actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance that under such circumstances a license would be available on
commercially reasonable terms, if at all. See "Business--Intellectual Property"
and "--Legal Proceedings."
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<PAGE> 12
Lengthy Sales Cycle. The Company's sales cycle involves test and evaluation
of its products by the potential customer and design of the customer's equipment
to incorporate the Company's products. The sales cycle for the test and
evaluation of the Company's products can range from three to six months or more,
and it can take an additional six months or more before a customer commences
volume production of equipment that incorporates the Company's products. Because
of this lengthy sales cycle, the Company may experience a delay between
increasing expenses for research and development and sales and marketing efforts
and the generation of higher revenues, if any, from such expenditures. In
addition, the delays inherent in such lengthy sales cycle raise additional risks
of customer decisions to cancel or change product plans, which could result in
the loss of anticipated sales by the Company. Achieving a design win provides no
assurance that such customer will ultimately ship products incorporating the
Company's products. The Company's business, financial condition and results of
operations could be materially adversely affected if a significant customer
curtails, reduces or delays orders during the Company's sales cycle or chooses
not to release products employing the Company's products. See "--Customer
Concentration," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Manufacturing."
Competition. The broadband communications markets and semiconductor
industries are intensely competitive and are characterized by rapid
technological change, evolving standards, short product life cycles and price
erosion. The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial digital broadcast, and xDSL, which
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
television set-top box with Rockwell, Philips, LSI Logic and VLSI Technologies
for communication devices and with SGS-THOMSON, LSI Logic and C-Cube in the MPEG
segment. The Company expects other major semiconductor manufacturers to enter
the market as the digital broadcast television and other digital cable
television markets become more established. A number of companies, including LSI
Logic, Rockwell and Toshiba, have announced that they are developing and plan to
introduce MCNS/DOCSIS compliant products in 1998, which could result in
significant competition in the cable modem market. In the high-speed networking
market, the Company principally competes with established suppliers including
Lucent Technologies, Level One, National Semiconductor and Advanced Micro
Devices ("AMD"). The Company's principal competitors in the DBS market include
LSI Logic, Philips, SGS-THOMSON and VLSI Technologies, and the Company's
principal competitors in the xDSL market include Analog Devices, Alcatel,
Motorola and Globespan. The Company also may face competition from suppliers of
products based on new or emerging technologies. Many of the Company's
competitors operate their own fabrication facilities and have longer operating
histories and presence in key markets, greater name recognition, access to
larger customer bases and significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than the Company. As
a result, such competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the promotion and sale of their products than the Company. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, the Company's competitors may in the
future develop technologies which more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost.
There can be no assurance that the Company will be able to compete successfully
against current or potential competitors, or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company believes that the transition of its products to increasingly smaller
geometries will be important for the Company to remain competitive. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes and, consequently, have suffered reduced yields, delays
in product deliveries and increased expense levels. Moreover, the Company is
dependent on its relationships with its foundries to migrate to smaller geometry
processes successfully. No assurance can be given that the Company's future
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<PAGE> 13
process migrations will be achieved without difficulties. The Company's
business, financial condition and results of operations could be materially and
adversely affected if any such transition is substantially delayed or
inefficiently implemented. See "Business--Manufacturing."
Order and Shipment Uncertainties. The Company's sales are generally made
pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or deferral
of product orders could result in the Company holding excess inventory, which
could have a material adverse effect on the Company's profit margins and
restrict its ability to fund its operations. The Company recognizes revenue upon
shipment of products to the customer. Refusal of customers to accept shipped
products or delays or difficulties in collecting accounts receivable could
result in significant charges against income, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Cyclicality of the Semiconductor Industry. The Company provides
semiconductor devices to the broadband communications markets. The semiconductor
industry is highly cyclical and subject to rapid technological change and has
been subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production over-capacity. The semiconductor industry also periodically
experiences increased demand and production capacity constraints. As a result,
the Company may experience substantial period-to-period fluctuations in future
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Risks Associated with Expansion of International Business
Activities. Approximately 15.4% of the Company's total revenue in 1997 was
derived from sales to independent customers based outside the United States. In
addition, the Company often ships products to its domestic customers'
international manufacturing divisions. Further, the Company currently procures a
substantial portion of its manufacturing, assembly and test services from
suppliers located outside the United States. Accordingly, the Company is subject
to risks inherent in international operations, which include, but are not
limited to, the imposition of governmental controls, exposure to different legal
standards (particularly with respect to intellectual property), burdens of
complying with a variety of foreign laws, export license requirements, future
import and export restrictions, unexpected changes in regulatory requirements,
foreign technical standards, political, social and economic instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
operations, difficulties in collecting receivables and potentially adverse tax
consequences. Demand for the Company's products could also be adversely affected
by seasonality of international sales and economic conditions in the Company's
primary overseas markets. All of the Company's international sales to date have
been denominated in U.S. dollars. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make the Company's products
less competitive in international markets. There can be no assurance that the
risks associated with the Company's international operations will not materially
adversely affect the Company's business, financial condition and results of
operations in the future or require the Company to modify significantly its
current business practices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from the Company's other
development efforts, claims by the Company's customers or others against the
Company, or the loss of credibility with the
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<PAGE> 14
Company's current and prospective customers. Any such event could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Core Technologies" and "--Manufacturing."
Management of Expanded Operations. The Company has experienced a period of
rapid growth and expansion which has placed, and continues to place, significant
strain on its resources. To accommodate this growth, the Company will be
required to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of its accounting
and other internal management systems, all of which may require substantial
management effort. There can be no assurance that such efforts can be
accomplished successfully. In addition, this growth, as well as the Company's
product development and selling, general and administrative activities, has
necessitated an increase in the number of the Company's employees, resulting in
increased responsibilities for the Company's management. If the Company sustains
its growth in the future, it will need to continue to implement and improve its
operational, financial and management information systems and to hire, train,
motivate and manage its expanding employee base. There can be no assurance that
the Company's systems, procedures and controls will be adequate to support the
Company's operations. Any failure to improve the Company's operational,
financial and management information systems, or to hire, train, motivate or
manage its employees could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with Government Regulation. The Federal Communications
Commission (the "FCC") has broad jurisdiction over each of the Company's target
markets. Although the Company's products are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, much of the equipment into which the Company's products are incorporated
is subject to direct government regulation. Accordingly, the effects of
regulation on the Company's customers or the industries in which they operate
may, in turn, adversely impact the Company's business, financial condition and
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries other than the United States. Changes
in current laws or regulations or the imposition of new laws and regulations in
the United States or elsewhere, could materially adversely affect the Company's
business, financial condition and results of operations.
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities. Although the Company has no current
agreements or negotiations underway with respect to any material acquisitions,
the Company may make acquisitions of businesses, products or technologies in the
future. However, there can be no assurance that the Company will be able to
locate suitable acquisition opportunities. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, large
one-time write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's results of operations or
the price of the Company's Class A Common Stock. Furthermore, acquisitions
entail numerous risks, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. Since the Company has not made any material acquisitions in the
past, no assurance can be given as to the ability of the Company to successfully
integrate any businesses, products, technologies
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<PAGE> 15
or personnel that might be acquired in the future, and the failure of the
Company to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
Control by Directors, Executive Officers and Their Affiliates. Upon
consummation of this offering, the Company's directors and executive officers
will beneficially own approximately 55.9% of the outstanding Common Stock and
60.9% of the total voting control of the Company (or 60.6% of the total voting
control if the Underwriters' over-allotment option is exercised in full). In
particular, upon consummation of this offering, the two founders of the Company,
Dr. Henry Nicholas and Dr. Henry Samueli, will beneficially own an aggregate of
approximately 50.9% of the outstanding Common Stock and 55.4% of the total
voting control of the Company (or 55.2% of the total voting control if the
Underwriters' over-allotment option is exercised in full). Accordingly, such
persons will have sufficient voting power to control the outcome of matters
(including the election of a majority of the Board of Directors, and any merger,
consolidation or sale of all or substantially all of the Company's assets)
submitted to the shareholders for approval and will also have control over the
management and affairs of the Company. As a result of such control, certain
transactions may not be possible without the approval of such shareholders.
These transactions include proxy contests, mergers involving the Company, tender
offers, open market purchase programs or other purchases of Class A Common Stock
that could give shareholders of the Company the opportunity to realize a premium
over the then prevailing market price for their shares of Class A Common Stock.
See "Principal and Selling Shareholders."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. As a
result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. The
Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products. The Company is in the process of upgrading its
software to address the year 2000 issue. Because a large portion of the
Company's software is obtained from its vendors on a non-custom basis, the
Company believes that upgrades for its commercial programs are currently
available. The Company currently estimates that the costs associated with the
year 2000 issue, and the consequences of incomplete or untimely resolution of
the year 2000 issue, will not have a material adverse effect on the results of
operations or financial position of the Company in any given year. The Company
also relies, directly and indirectly, on external systems of business
enterprises such as customers, suppliers, creditors, financial organizations,
and of governmental entities, both domestic and international, for accurate
exchange of data. Even if the internal systems of the Company are not materially
affected by the year 2000 issue, the Company could be affected through
disruptions in the operation of the enterprises with which the Company
interacts. Despite the Company's efforts to address the year 2000 impact on its
internal systems and business operations, there can be no assurance that such
impact will not result in a material disruption of its business or have a
material adverse effect on the Company's business, financial condition or
results of operations.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that the net proceeds of this offering, together with cash generated
from its operations and funds available under its credit facilities, will be
adequate to satisfy its capital requirements for at least the next twelve
months. The Company's future capital requirements will depend on many factors,
including, but not limited to, the levels at which the Company maintains
inventory, the market acceptance of the Company's products, the levels of
promotion and advertising required to launch such products and attain a
competitive position in the marketplace, the extent to which the Company invests
in new technology and improvements to its existing technology and the response
of competitors to the products based on the Company's technology. To the extent
that the funds generated by this offering, together with existing resources, and
any future earnings are insufficient to fund the Company's activities, the
Company may need to raise additional funds through public or private financing.
No assurance can be given that additional financing will be available or that,
if available, any such financing can be obtained on terms favorable to the
Company and its shareholders. If adequate funds are not available, the Company
may be required to curtail its operations significantly or to obtain funds
through arrangements with strategic partners or others that may require the
Company to relinquish rights to
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<PAGE> 16
certain of its technologies or potential markets. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the then
existing shareholders of the Company, including purchasers of the Class A Common
Stock in this offering, would be reduced. Such equity securities may have
rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
No Prior Market; Stock Price Volatility. Prior to this offering, there has
been no public market for the Company's Common Stock. Consequently, the initial
public offering price will be determined by negotiations among the Company, the
Selling Shareholders and the representatives of the Underwriters based upon
factors that may not be indicative of future market performance. There can be no
assurance that an active public market for the Class A Common Stock will develop
or be sustained after this offering or that the market price of the Class A
Common Stock will not decline below the initial public offering price. The
trading price of the Company's Class A Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in results of
operations, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the semiconductor,
telecommunications and data communications equipment markets, changes in
earnings estimates or buy/sell recommendations by analysts, or other events or
factors. In addition, the public stock markets have experienced extreme price
and trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company's Class A Common Stock. See
"Underwriters."
Broad Management Discretion in Use of Proceeds. While the Company expects
to use the net proceeds of this offering for general corporate purposes, the
Company has not yet identified specific uses for such net proceeds, except that
the Company intends to pay approximately $2.5 million to its senior lender to
repay in full its term loan. Accordingly, the Company's management will retain
broad discretion as to the allocation of the net proceeds of this offering.
There can be no assurance that the proceeds will be utilized in a manner that
the shareholders deem optimal, or that the proceeds can or will be invested to
yield a significant return. See "Use of Proceeds."
Potential Effect of Anti-Takeover Provisions. The Company's Articles of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. In addition, the Company has outstanding Class B
Common Stock, which entitles each holder to ten votes per share on all matters
presented for a shareholder vote. The Board of Directors also has the authority
to fix the rights and preferences of shares of the Company's Preferred Stock and
to issue such shares without a shareholder vote. It is possible that the
provisions in the Company's Articles of Incorporation and Bylaws, the existence
of super voting rights held by insiders and the ability of the Board of
Directors to issue Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action by the
shareholders, may discourage bids for the Company's Class A Common Stock at a
premium over the market price of the Class A Common Stock and may adversely
affect the market price of the Class A Common Stock and the voting and other
rights of the holders of Class A Common Stock. See "Description of Capital
Stock."
Dilution. Purchasers of the Class A Common Stock in this offering will
suffer an immediate and substantial dilution of $9.48 per share in the net
tangible book value of the Common Stock from the initial public offering price.
Moreover, to the extent outstanding options or warrants to purchase the
Company's Common Stock are exercised in the future, there will be further
dilution. See "Dilution."
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market after this offering could adversely affect the
market price of the Class A Common Stock. Upon completion of this offering, the
Company will have 4,000,000 shares of Class A Common Stock and 39,205,077 shares
of Class B Common Stock outstanding. Of this amount, the 3,500,000 shares of
Class A Common Stock offered hereby will be available for immediate sale in the
public market as of the date of the
14
<PAGE> 17
Prospectus. 39,205,077 additional shares of Class B Common Stock are "restricted
securities" as defined in Rule 144 promulgated under the Securities Act, and
will be available for sale, subject to compliance with the holding period,
volume limitations and other restrictions of Rule 144 and expiration of a 180
day lockup period (unless such lockup obligation is waived earlier by Morgan
Stanley & Co. Incorporated in its sole discretion). The holder of 500,000 shares
of Class A Common Stock is subject to a one-year lock-up period. In addition,
the holders of 31,392,267 shares of Class B Common Stock are entitled to certain
rights with respect to registration of such shares for sale in the public
market. The Company also intends to file a registration statement covering the
sale of shares of Class A Common Stock reserved for issuance under its stock
benefit plans. See "Principal and Selling Shareholders," "Shares Eligible for
Future Sale" and "Underwriters."
15
<PAGE> 18
SALE OF SHARES TO CISCO SYSTEMS
Cisco Systems has exercised its option to purchase 500,000 shares of Class
A Common Stock concurrent with this offering at a price per share equal to the
initial public offering price, net of underwriting discounts and commissions
(the "Net Price"). Such option was granted to Cisco Systems in connection with a
development agreement entered into between the Company and Cisco Systems
effective September 1996. See "Certain Transactions--Development Agreement with
Cisco Systems."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Class A Common Stock offered by the Company hereby, assuming an initial public
offering price of $11.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the sale of 500,000 shares of Class A Common Stock to Cisco Systems
at the Net Price, are estimated to be $32,347,500 ($35,979,150 if the
Underwriters' over-allotment option is exercised in full). The primary purposes
of this offering are to obtain additional equity capital, create a public market
for the Company's Class A Common Stock, facilitate future access by the Company
to public equity markets and provide increased visibility for the Company in the
marketplace. The Company intends to use up to $2.5 million of the net proceeds
of this offering to repay outstanding advances under the Company's Loan and
Security Agreement with Silicon Valley Bank ("SVB"). This term loan matures in
June 2000 and bears interest at SVB's prime rate as announced from time to time
plus 0.5%. See Note 3 of Notes to Financial Statements. The proceeds from the
term loan were used for general working capital requirements. The balance of the
net proceeds will be used for general corporate purposes, including working
capital and capital purchases such as test equipment and leasehold improvements
associated with the Company's planned facilities expansion. Pending such uses,
the Company intends to invest its net proceeds of this offering in short-term,
investment-grade, interest-bearing securities. Management of the Company will
have broad discretion concerning the allocation and use of all of the net
proceeds of the offering to be received by the Company. The Company may use a
portion of the net proceeds of this offering for the acquisition of businesses,
products and technologies that are complementary to those of the Company. As of
the date of this Prospectus, the Company has not engaged in any agreements or
negotiations regarding any material acquisition.
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholders.
DIVIDEND POLICY
The Company has never paid cash dividends on shares of its capital stock.
The Company currently intends to retain any future earnings for use in its
business and does not anticipate paying cash dividends in the future.
Furthermore, the term loan with SVB currently prohibits the payment of cash
dividends without the prior consent of SVB.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect
the automatic conversion of all outstanding shares of Preferred Stock into an
aggregate of 8,453,517 shares of Class B Common Stock upon consummation of this
offering, and (iii) on a pro forma as adjusted basis to give effect to the sale
of 2,750,000 shares of Class A Common Stock by the Company in this offering at
an assumed initial public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 500,000 shares of Class A Common Stock
by the Company to Cisco Systems at the Net Price.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion(1)..................... $ 1,595 $ 1,595 $ 95
------- ------- -------
Shareholders' equity:
Preferred Stock, $.0001 par value; 10,000,000 shares
authorized; 3,567,839 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma and
pro forma as adjusted(2)............................... 28,617 -- --
Class A Common Stock, $.0001 par value; 200,000,000 shares
authorized; no shares issued and outstanding, actual
and pro forma; 4,000,000 shares issued and outstanding,
pro forma as adjusted(2)............................... -- -- --
Class B Common Stock, $.0001 par value; 100,000,000 shares
authorized; 31,501,560 shares issued and outstanding,
actual; 39,995,077 shares issued and outstanding, pro
forma; 39,205,077 shares issued and outstanding, pro
forma as adjusted(2)................................... 3 4 4
Additional paid-in capital................................ 7,126 35,742 68,090
Notes receivable from employees........................... (3,362) (3,362) (3,362)
Deferred compensation..................................... (1,090) (1,090) (1,090)
Retained earnings......................................... 2,098 2,098 2,098
------- ------- -------
Total shareholders' equity................................ 33,392 33,392 65,740
------- ------- -------
Total capitalization.............................. $34,987 $34,987 $65,835
======= ======= =======
</TABLE>
- ------------
(1) See Note 3 of Notes to Financial Statements.
(2) Based on shares outstanding as of December 31, 1997. Excludes (i) 6,478,940
shares of Class B Common Stock issuable upon exercise of options outstanding
at March 18, 1998 at a weighted average exercise price of $3.57 per share
and (ii) 10,305,149 shares of Common Stock reserved for issuance under the
Company's employee benefit plans. See Notes 1, 5 and 9 of Notes to Financial
Statements.
17
<PAGE> 20
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
approximately $4,775,000, or $0.15 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the conversion of all outstanding Preferred Stock into an
aggregate of 8,453,517 shares of Class B Common Stock, the pro forma net
tangible book value of the Company as of December 31, 1997 would have been
$33,392,000 or $0.84 per share of Common Stock. After giving effect to the sale
of the 2,750,000 shares of Class A Common Stock offered by the Company hereby at
an assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 500,000 shares of Class A Common Stock
to Cisco Systems at the Net Price, the pro forma net tangible book value of the
Company, as adjusted, at December 31, 1997 would have been $65,740,000 or $1.52
per share of Common Stock. This amount represents an immediate increase in such
net tangible book value of $0.69 per share to existing shareholders and an
immediate dilution of $9.48 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........ $ 11.00
Pro forma net tangible book value at December 31,
1997.............................................. $ 0.84
Increase attributable to Cisco Systems............... 0.11
Increase attributable to new investors............... 0.57
--------
Adjusted pro forma net tangible book value after this
offering and the sale of shares to Cisco Systems..... 1.52
--------
Dilution per share to new investors.................... $ 9.48
========
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price per share paid by
existing shareholders and to be paid by Cisco Systems and purchasers of the
shares offered by the Company hereby (assuming an initial public offering price
$11.00 per share before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)... 39,955,077 92.5% $35,746,000 50.3% $ 0.89
Cisco Systems.............. 500,000 1.2 5,115,000 7.2 10.23
New investors.............. 2,750,000 6.3 30,250,000 42.5 11.00
---------- ----- ----------- -----
Total............ 43,205,077 100.0% $71,111,000 100.0%
========== ===== =========== =====
</TABLE>
- ------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by existing shareholders to 39,205,077 or 90.7% (or 39,035,077
or 89.6% if the Underwriters' over-allotment option is exercised in full),
and will increase the number of shares held by new investors to 3,500,000 or
8.1% (or 4,025,000 or 9.2% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
As of December 31, 1997, options to purchase 5,401,432 shares of Class B
Common Stock were outstanding at a weighted average exercise price of $2.12 per
share. The computations in the foregoing tables assume no exercise of these
options. If all of these options were exercised, the dilution per share to new
investors would be decreased to $9.41. See "Management--Employee Benefit Plans"
and Note 5 of Notes to Financial Statements.
18
<PAGE> 21
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
the Prospectus. The balance sheet data as of December 31, 1996 and 1997 and the
statement of operations data for the years ended December 31, 1995, 1996 and
1997 have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statement of operations data for the year ended December
31, 1994 have been derived from audited financial statements of the Company not
included herein. The balance sheet data as of December 31, 1993 and the
statement of the Company operations data for the year ended December 31, 1993
have been derived from unaudited financial statements not included herein, which
unaudited financial statements were prepared by management of the Company on the
same basis as the audited financial statements included elsewhere herein and, in
the opinion of the Company, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue........................... $ -- $1,554 $4,317 $18,981 $31,668
Development revenue....................... 1,138 2,082 1,790 2,389 5,287
------ ------ ------ ------- -------
Total revenue............................... 1,138 3,636 6,107 21,370 36,955
Cost of revenue............................. -- 707 1,398 7,860 14,926
------ ------ ------ ------- -------
Gross profit................................ 1,138 2,929 4,709 13,510 22,029
Operating expense:
Research and development.................. 875 1,746 2,687 5,662 16,204
Selling, general and administrative....... 252 944 2,135 3,546 8,063
------ ------ ------ ------- -------
Total operating expense..................... 1,127 2,690 4,822 9,208 24,267
------ ------ ------ ------- -------
Income (loss) from operations............... 11 239 (113) 4,302 (2,238)
Interest and other income, net.............. 12 41 120 213 290
Net loss on sale of investments............. (8) (42) -- -- --
------ ------ ------ ------- -------
Income (loss) before income taxes........... 15 238 7 4,515 (1,948)
Provision (benefit) for income taxes........ 3 1 3 1,499 (775)
------ ------ ------ ------- -------
Net income (loss)........................... $ 12 $ 237 $ 4 $ 3,016 $(1,173)
====== ====== ====== ======= =======
Basic earnings (loss) per share(1).......... $ .00 $ .01 $ .00 $ .12 $ (.04)
====== ====== ====== ======= =======
Diluted earnings (loss) per share(1)........ $ .00 $ .01 $ .00 $ .09 $ (.04)
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 49 $ 100 $1,990 $ 4,657 $22,116
Working capital.............................. (223) 1,958 2,247 5,529 26,262
Total assets................................. 473 3,144 4,509 14,367 45,244
Long-term debt, including current portion.... 61 85 49 216 2,693
Convertible preferred stock.................. -- 2,161 3,150 6,084 28,617
Total shareholders' equity................... 24 2,474 3,475 9,770 33,392
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those projected in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors," "Business" and elsewhere
in this Prospectus. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed ICs for some of the most significant broadband communications markets
including cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. From the Company's inception in 1991
through 1994, it was primarily engaged in product development and the
establishment of strategic customer and foundry relationships. During this
period, the Company generated the majority of its total revenue from development
work performed for key customers. The Company began shipping its products in
1994, and subsequently the Company's total revenue has grown predominately
through sales of its semiconductor products. The Company intends to continue to
enter into development contracts with key customers, but expects development
revenue will constitute a decreasing percentage of its total revenue. The
Company also generates a small percentage of its product revenue from sales of
its system level reference designs.
The Company recognizes product revenue at the time of shipment. Provision
is concurrently made for estimated product returns, which have been immaterial
prior to the fourth quarter of 1997. The Company's products typically carry a
one year warranty. In the fourth quarter of 1997, the Company experienced
product returns in excess of $500,000 due to packaging defects. Such defects
were caused by one of the Company's assemblers, which reimbursed the Company for
such expenses.
Development revenue is recognized when earned. Approximately 15.4% of the
Company's total revenue in 1997 was derived from independent customers located
outside of the United States. All of the Company's revenue to date has been
denominated in U.S. dollars. See Note 8 of Notes to Financial Statements.
From time to time, the Company's key customers have placed large orders
causing quarterly revenue to fluctuate significantly, which fluctuations are
likely to continue in the future. For example, in the fourth quarter of 1997,
sales of the Company's networking products increased to approximately $7.6
million from $759,000 in the previous quarter. More than half of this increase
was attributable to sales to a single customer. Sales to the Company's largest
five customers (including sales to their respective manufacturing
subcontractors) accounted for 61.7% and 67.7% of the Company's total revenue for
1997 and 1996, respectively. The Company expects that these five customers will
continue to account for a significant portion of the Company's total revenue for
1998. See "Risk Factors--Customer Concentration" and "Business--Customers and
Strategic Relationships."
Various factors have in the past affected and may continue in the future to
affect the Company's gross margin, including, but not limited to, the Company's
product mix, the position of the Company's products in their respective life
cycles and the mix of the Company's product revenue and development revenue. For
example, newly-introduced products generally have higher average selling prices
and gross margins, both of which typically decline over product life cycles due
to competitive pressures and volume pricing agreements. The Company's gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors. See "--Quarterly Results of Operations" and "Risk
Factors--Fluctuations in Results of Operations."
20
<PAGE> 23
The sales cycle for the test and evaluation of the Company's products can
range from three to six months or more, with an additional three to six months
or more before a customer commences volume production of equipment incorporating
the Company's products. Due to such lengthy sales cycles, the Company may
experience a delay between increasing expenses for research and development and
selling, general and administrative efforts, and the generation of corresponding
revenue, if any. Furthermore, in 1998, the Company intends to increase
significantly its investment in research and development, selling, general and
administrative functions and inventory as it expands its operations. The Company
anticipates that the rate of new orders may vary significantly from month to
month. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, and the Company's operating results for that quarter and, potentially,
future quarters would be materially and adversely affected. "See Risk
Factors--Fluctuations in Results of Operations" and "--Lengthy Sales Cycle."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue:
Product revenue........................................... 70.7% 88.8% 85.7%
Development revenue....................................... 29.3 11.2 14.3
----- ----- -----
Total revenue............................................... 100.0 100.0 100.0
Cost of revenue............................................. 22.9 36.8 40.4
----- ----- -----
Gross profit................................................ 77.1 63.2 59.6
Operating expense:
Research and development.................................. 44.0 26.5 43.9
Selling, general and administrative....................... 35.0 16.6 21.8
----- ----- -----
Total operating expense..................................... 79.0 43.1 65.7
----- ----- -----
Income (loss) from operations............................... (1.9) 20.1 (6.1)
Interest and other income, net.............................. 2.0 1.0 0.8
----- ----- -----
Income (loss) before income taxes........................... 0.1 21.1 (5.3)
Provision (benefit) for income taxes........................ -- 7.0 (2.1)
----- ----- -----
Net income (loss)........................................... 0.1% 14.1% (3.2)%
===== ===== =====
</TABLE>
Total Revenue. Total revenue consists of product revenue generated
principally by sales of the Company's semiconductor products and development
revenue generated under development contracts with the Company's customers.
Total revenue for 1997 was $37.0 million, an increase of $15.6 million or 72.9%
from 1996. Total revenue for 1996 was $21.4 million, an increase of $15.3
million or 249.9% from $6.1 million in 1995. In each year, the increase was
primarily due to the introduction of new products and to a higher volume of
shipments of existing products to manufacturers of cable set-top boxes and
networking customers selling Fast Ethernet hubs and switches. In particular, the
majority of the increase in total revenue in 1997 was derived from sales of new
products, including the Company's Fast Ethernet Quad transceivers for the high-
speed networking market and its QAM receivers for digital cable set-top boxes.
Gross Profit. Gross profit represents total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by the Company's independent foundries and costs associated
with assembly, test and quality assurance for those products, as well as costs
of personnel and equipment associated with contracted development work. Gross
profit for 1997 was $22.0 million or 59.6% of total revenue, an increase of $8.5
million or 63.1% from 1996. Gross profit in 1996 was $13.5 million or 63.2% of
total revenue, an increase of $8.8 million or 186.9% from $4.7 million or 77.1%
of total revenue in 1995. In each year, the increase in absolute dollars was
largely due to higher total revenue. Gross margin declined in
21
<PAGE> 24
1997 from 1996 primarily due to volume pricing concessions made in 1997 for
cable set-top box products. Gross margin declined in 1996 from 1995 largely due
to a decline in higher margin development revenue as a percentage of total
revenue in 1996. The Company anticipates that gross margin will continue to
decline in the near future as the Company shifts from introductory pricing for
early generation products to volume pricing and due to an anticipated shift
towards lower margin products.
Research and Development Expense. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, as well as related subcontracting costs. Research
and development expense for 1997 was $16.2 million or 43.9% of total revenue, an
increase of $10.5 million or 186.2% from 1996. Research and development expense
for 1996 was $5.7 million or 26.5% of total revenue, an increase of $3.0 million
or 110.7% from 1995 expense of $2.7 million or 44.0% of total revenue in 1995.
In each year, the increase in absolute dollars was primarily due to the addition
of personnel for the development of new products and the enhancement of existing
products, as well as payments to outside consultants where specific resources
were needed in the development process. Research and development expense in
absolute dollars increased at a fairly steady rate for each quarter between 1995
and 1997 after taking into consideration the $1.2 million of non-recurring
engineering expense paid to General Instrument in the third quarter of 1997 for
development support services with respect to the Company's MPEG development
program. Such services included the engagement of several engineers from General
Instrument on a contract basis and the development of high level descriptions
and related documentation. The decline in research and development expense as a
percentage of total revenue reflects a significant increase in total revenue
during that period. The Company expects that research and development expense in
absolute dollars will increase in each year for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of employee related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for 1997 was $8.1 million or 21.8% of total revenue,
an increase of $4.5 million or 127.4% from 1996. Selling, general and
administrative expense for 1996 was $3.5 million or 16.6% of total revenue, an
increase of $1.4 million or 66.1% from $2.1 million or 35.0% of total revenue in
1995. In each year, the increase in absolute dollars principally reflected
higher personnel related costs resulting from a net increase in sales and
marketing personnel to address each of the Company's target markets. These
increases were also due in part to the hiring of senior level management and
administrative personnel and increased occupancy, legal and other professional
fees. The decline in selling, general and administrative expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period. As the Company's infrastructure expanded in 1997, selling, general and
administrative expense as a percentage of total revenue increased at a more
rapid rate than total revenue.
Deferred Compensation. In connection with the grant of certain stock
options to employees during 1997, the Company recorded aggregate deferred
compensation of approximately $1.1 million, representing the difference between
the deemed value of the Class B Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. Such amount is
presented as a reduction of shareholders' equity and amortized ratably over the
vesting period of the applicable options. Amortization of deferred compensation
recorded in 1997 was $66,000. The Company currently expects to record
amortization of deferred compensation of approximately $73,000 per quarter
through September 30, 2001.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and short-term investment
balances, less interest on the Company's term loan. Interest and other income,
net for 1997 was $290,000, an increase of $77,000 or 36.2% from 1996. Interest
and other income, net for 1996 was $213,000, an increase of $93,000 or 77.5%
from $120,000 in 1995. In each year, the increase was primarily due to interest
earned on higher levels of short-term investments and cash balances, partially
offset by interest expense incurred on higher average debt balances.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 40%, 33% and 43% for 1997, 1996 and 1995,
respectively. In each year, the difference between the Company's effective tax
rate and the federal statutory tax rate of 34% was primarily related to state
income taxes and research and development
22
<PAGE> 25
tax credits. The Company utilizes the liability method of accounting for income
taxes as set forth in Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. See Note 2 of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the eight quarters through December 31, 1997. This information is
unaudited but, in the opinion of the Company's management, reflects all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................... $3,692 $4,565 $4,590 $6,134 $ 3,959 $ 4,210 $ 8,096 $15,403
Development revenue................... 347 442 1,000 600 1,072 1,185 1,159 1,871
------ ------ ------ ------ ------- ------- ------- -------
Total revenue........................... 4,039 5,007 5,590 6,734 5,031 5,395 9,255 17,274
Cost of revenue......................... 1,719 2,010 2,215 1,916 2,534 2,276 4,047 6,069
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............................ 2,320 2,997 3,375 4,818 2,497 3,119 5,208 11,205
Operating expense:
Research and development.............. 856 1,048 1,449 2,309 2,686 3,519 5,503 4,496
Selling, general and administrative... 578 817 1,041 1,110 1,142 1,399 2,670 2,852
------ ------ ------ ------ ------- ------- ------- -------
Total operating expense................. 1,434 1,865 2,490 3,419 3,828 4,918 8,173 7,348
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from operations........... 886 1,132 885 1,399 (1,331) (1,799) (2,965) 3,857
Interest and other income (expense),
net................................... 19 52 45 97 60 3 (41) 268
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes....... 905 1,184 930 1,496 (1,271) (1,796) (3,006) 4,125
Provision (benefit) for income taxes.... 300 393 309 497 (508) (718) (1,202) 1,653
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....................... $ 605 $ 791 $ 621 $ 999 $ (763) $(1,078) $(1,804) $ 2,472
====== ====== ====== ====== ======= ======= ======= =======
Basic earnings (loss) per share(1)...... $ 0.02 $ 0.03 $ 0.02 $ 0.04 $ (0.03) $ (0.04) $ (0.07) $ 0.09
====== ====== ====== ====== ======= ======= ======= =======
Diluted earnings (loss) per share(1).... $ 0.02 $ 0.02 $ 0.02 $ 0.03 $ (0.03) $ (0.04) $ (0.07) $ 0.06
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................... 91.4% 91.2% 82.1% 91.1% 78.7% 78.0% 87.5% 89.2%
Development revenue................... 8.6 8.8 17.9 8.9 21.3 22.0 12.5 10.8
------ ------ ------ ------ ------- ------- ------- -------
Total revenue........................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue......................... 42.6 40.2 39.6 28.5 50.4 42.2 43.7 35.1
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............................ 57.4 59.8 60.4 71.5 49.6 57.8 56.3 64.9
Operating expense:
Research and development.............. 21.2 20.9 26.0 34.3 53.4 65.2 59.5 26.0
Selling, general and administrative... 14.3 16.3 18.6 16.4 22.7 25.9 28.8 16.6
------ ------ ------ ------ ------- ------- ------- -------
Total operating expense................. 35.5 37.2 44.6 50.7 76.1 91.1 88.3 42.6
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from operations........... 21.9 22.6 15.8 20.8 (26.5) (33.3) (32.0) 22.3
Interest and other income (expense),
net................................... 0.5 1.0 0.8 1.4 1.2 -- (0.5) 1.6
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes....... 22.4 23.6 16.6 22.2 (25.3) (33.3) (32.5) 23.9
Provision (benefit) for income taxes.... 7.4 7.8 5.5 7.4 (10.1) (13.3) (13.0) 9.6
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....................... 15.0% 15.8% 11.1% 14.8% (15.2)% (20.0)% (19.5)% 14.3%
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
23
<PAGE> 26
Total Revenue. Quarterly revenue increased throughout 1996 as a result of
the introduction of new products and higher unit shipments of the Company's
existing products in the cable set-top box, cable modem and high-speed
networking markets and generally reflected higher revenue from development
programs. The decrease in total revenue from $6.7 million in the fourth quarter
of 1996 to $5.0 million in the first quarter of 1997 was primarily due to a
reduction of unit shipments of 100Base-T4 high-speed networking products and
pricing concessions to a major customer for cable set-top boxes. The increase in
total revenue to $9.3 million in the third quarter of 1997 largely resulted from
the introduction of new products and increased unit shipments of existing cable
set-top box and cable modem products. The increase in total revenue to $17.3
million in the fourth quarter of 1997 was primarily due to the first significant
volume shipments of the Company's 100Base-TX high-speed networking products, as
well as $2.5 million of revenue from a take or pay contract with a significant
customer.
Gross Profit. As a percentage of total revenue, gross profit increased to
71.5% in fourth quarter 1996 as a result of a favorable product mix and a
significant increase in the volume of product shipments over the previous
quarters, which allowed fixed manufacturing costs to be spread over a larger
product base. In the first quarter of 1997, gross profit decreased to 49.6% of
total revenue as a result of an unfavorable product mix and pricing concessions
to a major customer for cable set-top boxes. Gross profit increased to 64.9% of
total revenue in the fourth quarter of 1997 as a result of volume shipments of
high-speed networking products and a significant increase in the volume of
product shipments generally.
Operating Expense. Research and development expense increased in absolute
dollars through the third quarter of 1997 to facilitate the expansion of
introduction of new products by the Company. Research and development expense in
the third quarter of 1997 included a substantial non-recurring engineering
expense, which consisted of approximately $1.2 million paid to General
Instrument for engineering support related to the Company's MPEG technology and,
as a result, research and development expense in the fourth quarter of 1997 was
lower than in the prior quarter. Selling, general and administrative expense has
also increased in absolute dollars as the Company has expanded its
infrastructure to accommodate the Company's expanding operations. In the third
and fourth quarters of 1997, the Company also incurred significant legal
expenses in conjunction with pending litigation and the negotiation of large
customer contracts. See "Business--Litigation."
The Company's quarterly results of operations have fluctuated significantly
in the past and may continue to fluctuate in the future based on a number of
factors, not all of which are in the Company's control. In particular, the
Company's results of operations have fluctuated in the past due to, among other
things, competitive pressures on selling prices; the volume of product sales;
the timing and cancellation of significant customer orders; lengthy sales
cycles; pricing concessions on volume sales; fluctuations in manufacturing
yields; changes in product mix; intellectual property disputes; the Company's
ability to develop, introduce and market new products and technologies on a
timely basis; introduction of products and technologies by the Company's
competitors; market acceptance of the Company's and its customers' products; and
the amount and timing of recognition of development revenue. The Company's
results of operations may also fluctuate in the future based on a number of
factors, including, but not limited to those listed above, as well as general
business conditions in the semiconductor industry and the broadband
communications markets; availability of foundry capacity and raw materials; the
quality of the Company's products; the timing of investments in research and
development; the Company's ability to expand and implement its sales and
marketing programs; the level of orders received that can be shipped in a
quarter; currency fluctuations; and general economic conditions. As a result of
the foregoing factors, the Company believes period to period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of private sales of equity securities and cash generated by
operations. At December 31, 1997, the Company had $26.3 million in working
capital and $22.1 million in cash and cash equivalents. The Company's operating
activities used cash in the amount of $2.6 million in 1997, and generated cash
in the amount of $3.2 million and $1.1 million in 1996 and 1995, respectively.
24
<PAGE> 27
Cash used in operating activities in 1997 was primarily attributable to a
net loss, growth in accounts receivable and inventory and a decrease in income
taxes payable, which more than offset growth in accounts payable and the
non-cash impact of depreciation and amortization. Cash provided by operating
activities in 1996 was primarily attributable to net income and growth in
accounts payable and income taxes payable, which more than offset growth in
accounts receivable. Cash provided by operating activities in 1995 was primarily
attributable to a decrease in accounts receivable, growth in accounts payable,
and the non-cash impact of depreciation and amortization.
The Company's investing activities used cash of $7.1 million in 1997, $3.7
million in 1996 and $116,000 in 1995, primarily for the purchase of capital
equipment. During 1998, the Company may use up to approximately $15.0 million to
purchase additional capital equipment to support its expanding operations. The
Company may finance these purchases from the proceeds of this offering, existing
cash, cash generated from its operations, borrowings under its credit
facilities, or a combination thereof. Cash provided by financing activities was
$27.1 million in 1997, $3.2 million in 1996 and $949,000 in 1995, primarily from
the sale of convertible preferred stock and, in 1997, the establishment of a
revolving credit facility and term loan.
In March 1995, the Company entered into a Loan and Security Agreement with
SVB which, as amended, provides for a $3.0 million term loan and a $3.0 million
revolving credit facility. This agreement also includes a $500,000 letter of
credit, provided that sufficient credit is available under the two facilities.
The availability of funds under the revolving credit facility is based on
eligible accounts receivable balances. At December 31, 1997, $2.5 million was
outstanding under the term loan and no amounts were outstanding under the
revolving credit facility or the letter of credit. The term loan matures in June
2000 and bears interest at SVB's prime rate plus 0.5%. The Company intends to
use a portion of the proceeds of this offering to repay the term loan.
Borrowings under the revolving credit facility and the term loan are secured by
substantially all of the Company's assets. The revolving credit facility and the
term loan contain significant financial and operating covenants, including
limitations on the ability of the Company to incur additional indebtedness and
restrictions on, among other things, the Company's ability to pay cash dividends
or take certain other corporate actions. See Note 3 of Notes to Financial
Statements.
As of December 31, 1997, the Company had no material commitments other than
commitments of approximately $2.1 million for the purchase of test equipment.
See Notes 3 and 4 of Notes to Financial Statements.
The Company believes that the net proceeds of this offering, together with
cash generated from its operations and funds available under its credit
facilities, will be sufficient to meet its capital requirements for at least the
next twelve months. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's products, the levels
of promotion and advertising required to launch such products and attain a
competitive position in the marketplace, volume pricing concessions, the extent
to which the Company invests in new technology and improvements to its existing
technology and the response of competitors to the products based on the
Company's technology. To the extent that the funds generated by this offering,
together with existing resources and future earnings, are insufficient to fund
the Company's future activities, the Company may need to raise additional funds
through public or private financing. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its shareholders. See "Use of Proceeds."
25
<PAGE> 28
BUSINESS
Broadcom is a leading developer of highly integrated silicon solutions that
enable broadband digital data transmission to the home and within the business
enterprise. The Company's products enable the high-speed transmission of data
over existing communications infrastructures, most of which were not originally
intended for digital data transmission. Using proprietary technologies and
advanced design methodologies, the Company has designed and developed ICs for
some of the most significant broadband communications markets, including the
markets for cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing circuits that implement complex communications algorithms, surrounded
by precision high-speed analog-to-digital and digital-to-analog converter
circuits. The Company's products integrate comprehensive systems solutions into
single chips or chip-sets, thereby eliminating costly external components,
reducing board space, simplifying the customer's manufacturing process, lowering
the customer's system costs and enabling higher performance. Customers currently
shipping broadband communications equipment incorporating the Company's products
include 3Com, Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and
consumer demand for high-speed access to multimedia information and
entertainment content, consisting of data, voice and video. This demand is being
driven by the growth of desirable information and entertainment content
accessible via the Internet and cable and data networks. Demand has also been
stimulated by the improved availability and affordability of access devices such
as set-top boxes, PCs and other consumer appliances. Computer processor speeds
over the last decade have increased dramatically and, as a result, significantly
improved the rate at which multimedia data can be processed. However, the rate
at which such data can be transmitted has not kept pace. This disparity has
become known as the "bandwidth gap" and has frustrated users and challenged
solutions providers in a number of markets.
The bandwidth gap has emerged in a variety of commercial and consumer
applications. Businesses are constantly seeking new ways to access and analyze
larger amounts of information to improve the quality of management decisions and
enhance customer and employee communications. Many businesses have deployed
local area networks ("LANs") which are principally based upon 10Base-T Ethernet
technology. Dell'Oro Group estimates that the worldwide installed base of
10Base-T Ethernet hub and switch ports was 184.3 million in 1997. The
proliferation of LAN usage within corporate networks has resulted in volumes of
electronic traffic that are rapidly outgrowing the ability of legacy LAN
technologies and infrastructures to readily transmit the traffic and has
exacerbated the bandwidth gap for businesses. As such, much of the installed
base of Ethernet ports will require upgrading to higher speeds as the
infrastructure continues to grow.
Individuals are also increasingly using their home PCs to access the
Internet and to telecommute. Consumer online usage is expected to increase
rapidly with the availability and market acceptance of low cost PCs (sub $1,000)
and the increased availability and improving quality of content. In addition,
the increasing number of next generation television set-top boxes, PCs and other
devices that feature integrated Internet access will contribute to the surging
demand for rapid access to information. International Data Corporation ("IDC")
estimates that between 1995 and 1997 the number of devices that had access to
the Internet grew from approximately 15.4 million to 64.4 million and
anticipates that the number of such devices will grow to over 232 million by
2000. Similarly, the available content on the Internet is also increasing
rapidly. IDC estimates that the number of web pages for Internet devices to
access grew from approximately 18.1 million in 1995 to approximately 250.5
million in 1997, and is expected to increase to 2.3 billion by 2000. As the
volume of traffic continues to grow, consumers are becoming increasingly
frustrated with the low performance of "last mile" remote access connections
that are typically limited to data rates of only 28.8 kbps to 56 kbps and
require several minutes or hours to download large multimedia intensive files.
26
<PAGE> 29
Business and residential PC users have not been the only ones affected by
the bandwidth gap. Cable television subscribers seeking more entertainment
options including Internet access, and cable service providers seeking higher
revenue services beyond basic cable, have generally been frustrated by the
limited amount of programming that can be provided over the existing cable
infrastructure, as well as the inability of that infrastructure to deliver
interactive multimedia content. With the advent of digital television and
digital compression technologies such as MPEG, the conversion from analog
transmission to digital transmission enables a dramatic increase in the number
of channels available to the subscriber. In late 1996, cable television service
providers began offering expanded services, including digital programming
through new digital set-top boxes as well as high-speed Internet access and
telecommuting through cable modems. Dataquest estimates that approximately 1.5
million digital cable set-top boxes were shipped worldwide in 1997 and that
approximately 12.5 million will be shipped in 2001. In order to satisfy customer
demand for increased programming and other entertainment options, and to
capitalize on the revenue growth opportunities associated with these expanded
services, service providers will have to deploy a new generation of digital set-
top boxes and headend equipment.
Much of the bandwidth gap is a result of the existing last mile
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper twisted pair wiring, coaxial cable
and wireless communication connections. Copper twisted pair wiring was
originally intended for the transmission of narrowband analog voice while
coaxial cable was intended for delivery of one-way analog video signals. These
analog infrastructures have numerous impairments, including limited spectrum,
noise, dispersion and multipath reflections, which make broadband transmission
(greater than 1.5 Mbps) of digital data very difficult.
Because it is impractical to replace these communications infrastructures
with entirely new infrastructures that are optimized for digital data
transmission, the fundamental challenge for service and equipment providers is
to enable broadband communications over existing infrastructures. These
providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace. The principal segments
that define this marketplace include:
Cable Set-Top Boxes. Cable operators are deploying digital cable set-top
boxes to facilitate high-speed digital communications between a
subscriber's television and the cable network. Cable set-top boxes are
currently able to support downstream (to the subscriber) transmission
speeds of up to 43 Mbps (North American standard) or 56 Mbps (international
standard), thereby enabling several hundred MPEG-2 compressed digital
television channels to be delivered to the consumer. Additional
applications for digital cable set-top boxes are expected to include
Internet access, interactive television and high definition television
("HDTV").
Cable Modems. Cable modems connect PCs to the cable network and have been
designed to achieve downstream transmission speeds of up to 43 Mbps (North
American standard) or 56 Mbps (international standard), and upstream (to
the network) transmission speeds of up to 20 Mbps. These transmission rates
are almost 1,000 times faster than the fastest analog telephone modems (56
kbps downstream and 28.8 kbps upstream) currently available. The high
speeds of cable modems should enable an entirely new generation of
multimedia-rich content over the Internet and make telecommuting a
productive and effective means for work at home.
High-Speed Networking. As communications bottlenecks have appeared in
corporate LANs, technologies such as Fast Ethernet (100 Mbps) and Gigabit
Ethernet (1,000 Mbps) are being employed to replace older technologies such
as 10Base-T Ethernet (10 Mbps) and Token Ring (16 Mbps). As desktops
continue to migrate to Fast Ethernet, the Company believes that Gigabit
Ethernet will emerge as the predominant backbone and server communications
technology, and will eventually migrate to the desktop.
Direct Broadcast Satellite and Terrestrial Digital Broadcast. DBS is the
primary alternative to cable for providing digital television programming
and can be used to transmit information at speeds of up to 90 Mbps. DBS
broadcasts video and audio data from satellites directly to set-top boxes
in the home via dish antennas. Other broadband wireless technologies
include (i) terrestrial digital broadcast television, the
27
<PAGE> 30
upgrade of analog broadcast television to digital which enables the
delivery of HDTV, (ii) Multichannel Multipoint Distribution Systems
("MMDS"), which use microwave frequencies (2.5 GHz) to transmit digital
video signals over terrestrial digital broadcast channels to digital
set-top boxes, and (iii) Local Multipoint Distribution Systems ("LMDS"),
which use even higher microwave frequencies (28 to 38 GHz) to transmit
video and data to digital set-top boxes over a shorter distance via a
cellular-like network.
Digital Subscriber Lines (xDSL). xDSL represents a family of newer
broadband technologies which use the copper twisted pair wiring in the
existing telephone local loops to deliver transmission speeds ranging from
128 kbps to 52 Mbps depending on the distance between the central office
and the subscriber. These data rates are expected to enable a wide range of
new services including high-speed Internet access and digital television.
The desire by equipment manufacturers and service providers to develop
these markets has created the need for new generations of semiconductor
solutions. Broadband transmission of digital information over existing
infrastructures requires highly integrated mixed-signal semiconductor solutions
to perform critical systems functions such as complex signal processing and
converting digital data to and from analog signals. Broadband communications
equipment requires substantially higher levels of system performance in terms of
both speed and precision that typically cannot be adequately addressed by
traditional IC solutions developed for low speed transmission applications.
Moreover, solutions that are based on multiple discrete analog and digital ICs
generally cannot achieve the cost-effectiveness, performance and reliability
required by the broadband communications markets. These requirements are best
addressed by new generations of highly integrated mixed-signal devices that
combine complex analog and digital functions with high performance digital
signal processing ("DSP") circuitry that can be manufactured in high volumes
using cost-effective semiconductor technologies.
THE BROADCOM SOLUTION
The Company is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. Using its proprietary communications algorithms and
protocols, unique DSP architectures, silicon compiler design methodologies and
full-custom, mixed-signal circuit design techniques, the Company has designed
and developed ICs for some of the most significant broadband communications
markets, which include cable set-top boxes, cable modems, high-speed networking,
DBS and terrestrial digital broadcast, and xDSL. The Company's expertise in
communications algorithms and its detailed understanding of transmission media
enables the implementation of complex systems incorporating signal processing
functions such as digital demodulation, adaptive equalization and error
correction in a single device. In addition, the Company's comprehensive
knowledge of advanced communications protocols enables the Company to design
protocol processing ICs that seamlessly interface its mixed-signal transceiver
ICs with higher-level networking layers for communications applications.
Finally, the Company's systems level communications expertise has enabled it to
establish a viable long-term product roadmap that permits its customers to
achieve rapid time-to-market over multiple generations of equipment.
All of the Company's products are implemented in low-cost,
highly-manufacturable CMOS technologies which enable the integration of
comprehensive systems solutions into single-chip ICs, thereby eliminating costly
external components, reducing board space, simplifying the customer's equipment
manufacturing process, lowering customer system costs and enabling higher
performance. The Company's proprietary technology and advanced design
methodologies result in a high likelihood of first pass silicon success,
accelerated time-to-market, and ease of porting to multiple foundries. The
Company's design methodologies also allow it to rapidly and cost-effectively
incorporate proprietary features or intellectual property from its key strategic
customers into products that are exclusive to those customers, thereby enabling
them to differentiate their products. Customers currently shipping broadband
communications equipment that incorporates the Company's products include 3Com,
Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
28
<PAGE> 31
STRATEGY
The Company's objective is to be the leading provider of highly integrated
silicon solutions to the worldwide broadband communications markets. Key
elements of the Company's strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. The
Company's strategy is to identify rapidly growing broadband digital
communications markets and to develop highly integrated silicon solutions
for applications in those markets. The Company's initial products were
designed for the cable set-top box, cable modem and high-speed networking
markets, which require high-performance, feature-rich and highly integrated
semiconductor solutions. The Company has recently leveraged the core
technologies it developed for these markets to design and develop
semiconductor solutions for the DBS and terrestrial digital broadcast, and
xDSL markets, which it believes have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. The
Company has established strategic relationships with key equipment
manufacturers, including 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta, which are market and
technology leaders within the broadband communications markets. While the
Company designs products that can be used by multiple customers, the
Company's proprietary design methodologies allow it to rapidly design
custom features based on either the Company's or its customers'
intellectual property. This capability enables the Company's customers to
improve their time-to-market, differentiate their products and address new
market opportunities. The Company believes that these strategic
relationships are essential to its continued growth and to further
development and acceptance of its technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. The Company
is aggressively building on its technology leadership by investing
substantial development resources in all of its key technology areas. The
Company works closely with leading communications systems companies to
develop new and enhanced algorithms that address next generation broadband
market opportunities. The Company's strategy is to continue to implement
these algorithms in highly integrated, full-custom ICs using DSP
architectures that optimize performance, efficiency and cost. During
product development, the Company leverages its silicon compiler
technologies and proprietary circuit libraries and layouts of high-
performance analog and digital IC building blocks, thereby accelerating
time-to-market for new products. The silicon solutions for each of these
markets benefit from the same underlying core technologies, providing the
Company significant leverage in its ability to address a diverse set of end
user markets with a relatively focused investment in research and
development.
Drive Industry Standards. The Company participates actively in the
formulation of critical standards for the broadband communications markets.
The Company believes such participation provides it with several
significant benefits, including (i) accelerating and expanding the
development of markets for the Company's products by encouraging all market
participants to focus their efforts on developing products compliant with
the standards, and (ii) providing valuable insight and relationships, which
assist the Company in being early to market with products incorporating the
standards. The Company has established strategic relationships with major
networking equipment and cable modem vendors and was a principal
participant in formulating and writing the Multimedia Cable Network Systems
Data Over Cable Services Interface Specifications ("MCNS/DOCSIS") for the
end-to-end delivery of high-speed data services over hybrid fiber coax
("HFC") networks, which facilitate the development of interoperable
networking products, including cable modems. The Company's active
participation in this process enabled it to be the first provider of
transmission and protocol ICs to equipment manufacturers developing
MCNS/DOCSIS compliant products. The Company is also currently participating
in the formulation and evolution of standards for Fast Ethernet, Gigabit
Ethernet and xDSL systems.
Focus on Highly Integrated Solutions. The Company believes its analog
mixed-signal technology and advanced design methodologies enable it to
offer silicon solutions that are more highly integrated than competitive
alternatives. High levels of integration and aggressive product development
roadmaps allow the Company to enhance the value-added benefits of its
products in its customers' systems. Integration, which reduces the total
component count in the system, provides many fundamental benefits for the
29
<PAGE> 32
Company's customers, including streamlining their production flow,
improving yields, saving board space, shortening time-to-market, reducing
production costs and improving performance and reliability. These benefits
have often enabled the Company's customers to achieve faster and broader
penetration within their respective markets.
MARKETS
The increased demand for the high-speed delivery of data and video services
is forcing equipment vendors and service providers to race to provide solutions
to close the bandwidth gap. The Company's silicon solutions address the
bandwidth gap in multiple communications markets. While the communication
infrastructures of these markets are very different, the Company has been able
to leverage many of its core technologies across multiple markets in various
product implementations. Many industry analysts project high growth rates for
the markets served by the Company's products even though such markets are at
different phases in their evolution. High-speed networking is an established
market that is currently going through an upgrade; cable and DBS set-top boxes
are, on a global basis, in an early growth phase, and the cable modem and xDSL
markets are emerging.
Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity in
television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide picture quality that is comparable to DBS, cable service providers began
offering digital programming in 1996 through new digital cable set-top boxes.
Paul Kagan Associates, Inc. ("Kagan") estimates that in 1997 only 600,000 of the
65 million cable subscribing homes in the United States had installed digital
cable set-top boxes. Dataquest estimates that approximately 1.5 million digital
cable set-top boxes were shipped worldwide in 1997, and that approximately 12.5
million will be shipped in 2001. General Instrument, in particular, recently
announced its agreement to provide leading multiple cable system operators with
an aggregate of 15 million digital cable set-top boxes over the next three to
five years. The Company believes a new generation of digital cable set-top boxes
will be introduced in the near future to facilitate television Internet access
and to support HDTV.
Cable Modems
Cable television operators are upgrading their coaxial cable trunk systems
(backbones) to fiber to create HFC networks. These upgraded networks are able to
support two-way communications, high-speed Internet access and telecommuting
through the use of a cable modem. High-speed Internet access services, including
@Home, RoadRunner and HighwayOne (the predecessor to MediaOne), were introduced
in 1996 in conjunction with several MSOs. Kagan estimates that high-speed
Internet service was available to 11.4 million homes in 1997 and predicts that
this service will be extended to 45.7 million homes in the United States by
2001. In-Stat estimates that the number of cable modems shipped worldwide will
increase from 171,000 units in 1997 to 10.0 million by 2001. The cable
industry's adoption of the MCNS/DOCSIS specifications in 1997 for the end-to-end
delivery of high-speed data services is anticipated to enable interoperability
between different manufacturers' cable modems and headend equipment across
different cable networks. This interoperability should facilitate the creation
of a retail market for cable modems.
High-Speed Networking
The high-speed networking equipment market is undergoing a rapid transition
from 10Base-T Ethernet to Fast Ethernet (100Base-T) transceivers, with Gigabit
Ethernet (1000Base-T) anticipated to be introduced in 1998. Dell'Oro Group
estimates that the number of 100Base-T repeater/hub ports sold worldwide is
expected to grow from 5.6 million in 1997 to 23 million by 2001, and the number
of switch ports is expected to grow from 5.2 million to 64 million during the
same period. IDC predicts the number of 100Base-T network interface cards
("NIC") sold worldwide will grow from 11.5 million units in 1997 to 39 million
units by 2001. As the networking market transitions to Fast Ethernet and Gigabit
Ethernet, it is anticipated that a significant
30
<PAGE> 33
portion of the installed base of 10Base-T repeater/hub ports, switches and NICs
will be upgraded to the faster technologies.
Direct Broadcast Satellite and Terrestrial Digital Broadcast
Due to the ability of DBS to provide television programming where no cable
infrastructure is in place, it is expected that the U.S. market for DBS may
eventually be surpassed by the international market where the cable
infrastructure is generally less extensive. Dataquest estimates that
approximately 6.7 million digital satellite set-top boxes were shipped worldwide
in 1997 and that approximately 17.4 million will be shipped in 2001. Other
wireless offerings such as MMDS and LMDS are currently being tested in limited
deployments. These new networks, which are able to provide programming in areas
that do not have cable, will also require a digital set-top box. Beginning in
1999, the FCC has mandated that the top four affiliated television stations
begin digital broadcasting and has required that all current television
broadcasters and their affiliates return the old analog spectrum by the year
2006 for FCC auction. ABC, CBS and NBC have announced that they will begin
transmitting HDTV in the fall of 1998. This conversion to digital broadcasting
will also require new set-top boxes and television receivers.
Digital Subscriber Lines (xDSL)
xDSL is a family of technologies for high-speed data transmission over
existing copper twisted pair wiring in the telephone local loops. Several
Regional Bell Operating Companies ("RBOCs"), including Southwestern Bell, Bell
Atlantic, Bell South and U S West, and several international telephone
companies, including Bell Canada, British Telecom and Deutsche Telekom, have
conducted field trials, deployed or announced plans to conduct trials or deploy
xDSL services in select markets for high-speed Internet access and
telecommuting. Certain Internet service providers are also embracing xDSL
technologies. In January 1998, Compaq, Intel, Microsoft and several RBOCs
announced they would coordinate their efforts to create an interoperable xDSL
standard for 1.5 Mbps transmission. Dataquest Incorporated estimates that the
number of xDSL modems manufactured worldwide will increase from 385,000 units in
1997 to 4.9 million units in 2001. Asymmetric DSL ("ADSL"), which can provide
transmission at speeds of up to 8 Mbps, and Very-high-bit-rate DSL ("VDSL"),
which can provide transmission at speeds of up to 52 Mbps, represent the xDSL
technologies that have recently attracted the most interest from the service
providers. VDSL modems are still in the development stage, but represent a
promising medium for broadband communications.
31
<PAGE> 34
CUSTOMERS AND STRATEGIC RELATIONSHIPS
The Company sells its products to leading manufacturers of data
communications equipment in each of the Company's target markets. Because the
Company leverages its technology across different markets, certain of the
Company's ICs may be incorporated into equipment used in several different
markets. Equipment manufacturers from which the Company recognized aggregate
revenue of at least $100,000 in 1997 included, among others:
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------
MARKETS CUSTOMERS
---------------------------------------------------------------------------------------
Cable Set-Top Boxes General Instrument
Scientific-Atlanta
---------------------------------------------------------------------------------------
Cable Modems 3Com
Bay Networks
Cisco Systems
Com21
Ericsson
General Instrument
Hybrid Networks
Motorola
Scientific-Atlanta
---------------------------------------------------------------------------------------
High-Speed Networking 3Com
Accton Technology
Adaptec
Alantec/Fore
Bay Networks
Cabletron
Cisco Systems
Digital Equipment Corporation
D-Link
Standard Microsystems
---------------------------------------------------------------------------------------
DBS and Terrestrial Digital General Instrument
Broadcast Italtel
Samsung
---------------------------------------------------------------------------------------
xDSL General Instrument (Next Level Communications)
Nortel
---------------------------------------------------------------------------------------
</TABLE>
As part of its business strategy, the Company periodically establishes
strategic relationships with certain key customers. In September 1997, the
Company entered into a Development, Supply and License Agreement with General
Instrument, pursuant to which the Company agreed to develop ICs for General
Instrument's digital cable set-top boxes and supply such ICs to General
Instrument for four years. Pursuant to this agreement, General Instrument agreed
to purchase from the Company 100% of its requirements for components containing
transmission, communications or video decompression (MPEG) functions for its
digital cable set-top box subscriber products in the first year of this
agreement, subject to the Company's good faith efforts to maintain its
competitive position with respect to such components. The percentage of its
product requirements that General Instrument must purchase from the Company
declines each year over the term of the agreement to 45% of General Instrument's
requirements in 2001. General Instrument also granted the Company a
royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG and
related technology.
From time to time, the Company has also entered into development agreements
with 3Com, Cisco Systems, Nortel and DirecTV, pursuant to which the Company has
worked closely with these customers to co-develop products for these customers.
32
<PAGE> 35
A small number of customers have historically accounted for a substantial
portion of the Company's total revenue. Sales to General Instrument and 3Com
(including sales to their respective manufacturing subcontractors) accounted for
approximately 31.9% and 14.6%, respectively, of the Company's total revenue in
1997. Sales to General Instrument and 3Com (including sales to their respective
manufacturing subcontractors) represented approximately 25.2% and 24.9%,
respectively, of the Company's total revenue in the fourth quarter of 1997.
Sales to the Company's five largest customers represented approximately 61.7%
and 71.5% of the Company's total revenue in 1997 and the fourth quarter of 1997,
respectively. The loss of any key customer could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors--Customer Concentration."
PRODUCTS
The Company's five primary product lines encompass: (i) high-speed
communications and MPEG video/audio devices for the cable television set-top box
market, (ii) high-speed data transmission and media access control devices for
the cable modem market, (iii) 10/100Base-T Ethernet transceivers and repeater
controllers for the high-speed networking market, (iv) receivers and MPEG
video/audio devices for the DBS and terrestrial digital broadcast markets, and
(v) broadband twisted pair transceivers for the xDSL market. The Company also
develops and sells reference platforms designed around its IC products that
represent application examples for incorporation into its customers' equipment.
By providing these reference platforms, the Company can assist its customers in
achieving easier and faster transitions from initial prototype designs through
final production releases. These reference platforms significantly enhance the
customer's confidence that the Company's products will meet their market
requirements and product introduction schedules.
Cable Set-Top Boxes
The Company offers a suite of silicon solutions for digital cable set-top
boxes and cable headends which encompass the high-speed transmission, reception
and decompression of digital audio and video multimedia signals. These products
are also applicable to the terrestrial digital broadcast markets. The Company's
QAMLink transmission products integrate the core functionality required of
advanced communications transceiver devices including modulators and
demodulators for quadrature amplitude modulation ("QAM") and quadrature phase
shift keying ("QPSK"), adaptive equalization, forward error correction and
high-speed analog-to-digital and digital-to-analog conversion. These products
have been designed to meet both international and North American communications
standards for cable networks. Several of these products also incorporate
additional set-top box functionality such as cable network protocol processing
for entitlement and tiered programming access and input/output device control.
The Company plans to introduce its first single-chip MPEG multimedia device
in the first half of 1998 that incorporates all of the processing capabilities
necessary to decode and decompress an MPEG-2 digital television data stream and
subsequently reconstruct an analog studio quality television signal that can be
displayed on a standard television receiver. This IC will integrate MPEG-2 video
decompression, Dolby AC3 audio decompression, MPEG-2 transport processing,
on-screen display, analog video reconstruction and other necessary MPEG related
functions required to deliver video and audio to a television. The combination
of the Company's transmission and MPEG silicon solutions will provide all of the
significant silicon functionality of most existing digital cable set-top boxes
with the exception of the security functions, the general purpose microprocessor
and memory.
Cable Modems
The Company has leveraged its core transmission technologies that were
developed for the cable set-top box market and adapted them to the development
of a family of products that enable digital data to be delivered over an HFC
cable network at downstream speeds of up to 56 Mbps and upstream speeds of up to
20 Mbps. These products incorporate similar modulation, adaptive equalization
and error correction technologies as the set-top box products and thereby
achieve robust and reliable transmission, especially in the noisy and
interference prone upstream direction. The cable modem product family also
includes both a headend and a subscriber media access controller ("MAC") device
that controls the upstream and downstream data flow over the HFC network. The
Company's cable modem products have been designed to conform to the
33
<PAGE> 36
MCNS/DOCSIS specifications. The combination of the transmission and MAC ICs
provides a complete end-to-end silicon platform for the Company's customers to
build headend systems and subscriber modems.
The Company's principal products for cable set-top boxes and cable modems
include the following:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ----------------------------------------------------------------------------------------------
BCM3033 Universal headend QAM modulator. First Quarter 1997
- ----------------------------------------------------------------------------------------------
BCM3036 Universal QPSK/QAM burst modulator. Fourth Quarter 1996
- ----------------------------------------------------------------------------------------------
BCM3037 Universal QPSK/QAM burst modulator for MCNS/DOCSIS applica- Fourth Quarter 1997
tions.
- ----------------------------------------------------------------------------------------------
BCM3115 Downstream QAM receiver for North American set-top box Fourth Quarter 1995
applications. Includes QPSK control channel receiver.
- ----------------------------------------------------------------------------------------------
BCM3116 Downstream QAM receiver for North American set-top box and Fourth Quarter 1997
MCNS/DOCSIS applications.
- ----------------------------------------------------------------------------------------------
BCM3118 Downstream QAM receiver for international applications. Fourth Quarter 1996
- ----------------------------------------------------------------------------------------------
BCM3120 Universal set-top box transceiver for both North American First Half 1998*
and international applications. Includes QAM receiver, QPSK
control channel receiver, peripheral device interfaces and
QPSK/QAM transmitter.
- ----------------------------------------------------------------------------------------------
BCM3137 Headend QPSK/QAM burst receiver for MCNS/DOCSIS First Half 1998*
applications.
- ----------------------------------------------------------------------------------------------
BCM3210 Headend MCNS/DOCSIS MAC for downstream and upstream traffic First Half 1998*
flow. Includes data encryption and decryption.
- ----------------------------------------------------------------------------------------------
BCM3220 Subscriber MCNS/DOCSIS cable modem MAC for downstream and Fourth Quarter 1997
upstream traffic flow. Includes data encryption and
decryption.
- ----------------------------------------------------------------------------------------------
BCM3900 Downstream QAM receiver for North American set-top box First Quarter 1997
applications. Includes QPSK control channel receiver and
peripheral device interfaces.
- ----------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video First Half 1998*
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- ----------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
High-Speed Networking
The Company's networking products provide the core functionality required
for building Fast Ethernet (100Base-T) adapter cards, repeater/hubs and
switches. The Company's transceivers, which are the basic elements required for
implementing a high-speed Ethernet port, incorporate the Company's embedded DSP
algorithms combined with high-speed analog-to-digital and digital-to-analog
converters to create a highly-integrated mixed-signal solution. In addition to
the DSP based architecture, features of the 100Base-T transceiver products
include low power and low voltage operation (3.3 volts) making them suitable for
personal computer motherboards and CardBus/PCMCIA adapter cards applications for
laptop PCs. The Company also offers a variety of repeater controller and
management devices, thereby providing a broad suite of Fast Ethernet products to
meet the demands of the adapter card, repeater/hub, switch and router markets.
34
<PAGE> 37
The Company's principal networking products include the following:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- ----------------------------------------------------------------------------------------------
BCM5012 100Base-T managed repeater controller. Incorporates 13 Fourth Quarter 1995
repeater ports, MAC port, microprocessor port, and a port
for stacking hubs. Interfaces to external transceivers.
- ----------------------------------------------------------------------------------------------
BCM5020 100Base-T network management processor. Incorporates Second Quarter 1997
statistical analysis of network traffic to enable control of
repeating hubs by network management software.
- ----------------------------------------------------------------------------------------------
BCM5100 Single-channel 10/100Base-T4 transceiver. Incorporates a Fourth Quarter 1996
10Base-T and 100Base-T4 transceiver for Category 3, 4 and 5
twisted pair cabling.
- ----------------------------------------------------------------------------------------------
BCM5201 Single-channel 10/100Base-TX transceiver. Incorporates a First Quarter 1998
10Base-T and 100Base-TX transceiver for Category 5 twisted
pair cabling.
- ----------------------------------------------------------------------------------------------
BCM5203 Quad 100Base-TX transceiver. Contains four 100Base-TX Fast Second Quarter 1997
Ethernet transceivers.
- ----------------------------------------------------------------------------------------------
BCM5205 Quad 100Base-TX integrated repeater. Incorporates four Second Quarter 1997
100Base-TX transceivers, MII port, repeater controller and
repeater management functions.
- ----------------------------------------------------------------------------------------------
BCM5208 Quad 10/100Base-T transceiver. Integrates four Third Quarter 1997
10Base-T/100Base-TX transceivers. 100Base-FX is also
supported at each port through an external fiber optic
transceiver.
- ----------------------------------------------------------------------------------------------
</TABLE>
Direct Broadcast Satellite and Terrestrial Digital Broadcast
The Company's products for the DBS market are designed to meet the needs of
satellite set-top box providers and incorporate the functionality necessary to
receive, demodulate and decode a broadband QPSK signal, including advanced
forward error correction. These products can be programmed to accommodate
satellite standards such as DSS (DirecTV), DVB (international) and Primestar,
and can operate at any data rate from 2 to 90 Mbps. The Company's MPEG system on
a chip (BCM7010) will employ the MPEG-2 standard, which enables it to be used in
either cable set-top boxes or DBS set-top boxes.
The Company's principal DBS products include the following:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- -----------------------------------------------------------------------------------------
BCM4200 QPSK receiver for DSS (DirecTV) and DVB (international) First Quarter 1997
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -----------------------------------------------------------------------------------------
BCM4201 Universal QPSK receiver for DSS, DVB and Primestar First Half 1998*
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -----------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video First Half 1998*
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- -----------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
Digital Subscriber Lines (xDSL)
The Company's product for xDSL transmission incorporates the functionality
to enable data to be transmitted and received at high speed over the existing
copper twisted pair wiring in the telephone local loops. The Company believes it
currently offers the industry's only single-chip silicon solution that can be
configured to operate at data rates spanning ISDN (128 kbps) to VDSL (52 Mbps),
thereby accommodating the needs of a wide variety of xDSL market segments in a
single IC. This solution offers network operators the ability to initially
install high-speed ADSL data services on the existing local loop plant and
subsequently offer higher
35
<PAGE> 38
data rates for video related services on an upgraded plant. The Company has
leveraged its mixed-signal and digital signal processing design expertise
developed for cable television and wireless products to develop the following
QAM transceiver product for the xDSL market.
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
- -----------------------------------------------------------------------------------------
BCM6010 Scalable xDSL QAM transceiver for twisted-pair Third Quarter 1997
applications. Incorporates ATM Utopia interface and
programmable rate transmitter and receiver. Can
accommodate data rates from 128 kbps to 52 Mbps in either
a symmetric or asymmetric configuration.
- -----------------------------------------------------------------------------------------
</TABLE>
The Company's future success will depend upon its ability to develop new
silicon solutions for existing and new markets, introduce such products in a
timely and cost-effective manner, and achieve design wins. There can be no
assurance that the Company will be able to develop or introduce new products in
a timely and cost-effective manner or in sufficient quantities to meet customer
demand or that such products will satisfy customer requirements or achieve
market acceptance. See "Risk Factors--Dependence on Development of New
Products."
CORE TECHNOLOGIES
The Company believes that one of its key competitive advantages is its
broad base of core technologies encompassing the complete design space from
systems to silicon. The Company has developed and continues to build on four
primary technology foundations: (i) proprietary communications systems
algorithms and protocols, (ii) advanced digital signal processing hardware
architectures, (iii) silicon compiler design methodologies and advanced cell
library development for both standard cell and full-custom IC design, and (iv)
high performance analog and mixed-signal circuit design using industry standard
CMOS processes.
Communications Algorithms and Protocols
The Company was an innovator in integrating a high-speed QAM digital
demodulator with an adaptive equalizer and forward error correction into a
single IC. In addition, the Company has continued to make system advances in the
areas of FEC, QAM and QPSK modulation and demodulation, variable rate
transmitters and receivers, digital clock and carrier recovery techniques and
adaptive equalization algorithms. The Company has also designed and deployed
fully integrated, DSP-based transceiver chips for Fast Ethernet LAN
applications. The Company has developed a compact core transceiver module that
employs high performance 125 MBaud digital equalizers and high-speed
analog-to-digital converters and clock recovery circuits. This core module has
been used in a number of the Company's single channel and quad transceiver
products for Fast Ethernet (100Base-TX) applications including NICs, switches
and repeaters. This DSP transceiver expertise is now being extended and applied
to the development of a Gigabit copper twisted pair transceiver. In addition to
data transmission algorithms, the Company has developed significant expertise in
networking protocols which it has applied to the development of MAC devices for
cable modems and interactive set-top box applications as well as repeater
controllers for Fast Ethernet applications. The Company has introduced the
industry's first MCNS/DOCSIS MAC ICs for cable modems.
Digital Signal Processing Hardware Architectures
The Company has developed cost-effective, single-chip broadband
transceivers by mapping complex communications algorithms into low-complexity
DSP hardware architectures. The Company is a technology leader in the area of
low-complexity, high-performance "silicon embedded algorithms" whereby the
communications algorithms are individually implemented in full-custom logic
rather than the conventional approach of running all of the algorithms in
firmware on a single general purpose programmable DSP architecture. This design
approach is combined with silicon compiler based design methodologies which
generate the custom logic functions. This results in ICs that are less complex
and less expensive to manufacture than conventional implementations. One
particular area where the Company has developed leading DSP technology is in
digital adaptive equalization. Equalizers are key components in all of the
Company's transceiver products. The
36
<PAGE> 39
Company believes that the speed and density of its equalizers help to
distinguish its products in the marketplace. The Company is currently developing
a single-chip, mixed-signal adaptive DSP transceiver for Gigabit Ethernet, which
the Company expects will perform in excess of 100 billion operations per second.
Silicon Compiler Design Methodologies
The Company has developed proprietary silicon compiler technologies that
enable designers to implement ICs using a high level of abstraction yet produce
area-efficient IC layouts and achieve short design cycles. The cells that are
synthesized from this process can be individually optimized for functionality,
performance, topology, electrical characteristics and manufacturing process
portability. The Company has designed compilers for standard cells, arithmetic
processing, memories and analog building blocks. In addition, the Company has
created compilers to manage the implementation of higher level functions such as
digital filters, adaptive equalizers, modulators, demodulators, numerically
controlled oscillators and direct digital frequency synthesizers. The Company
believes that these silicon compiler capabilities accelerate time-to-market by
improving designer productivity and by providing functional blocks that can be
reused in multiple products. In addition, these compiler techniques
significantly reduce errors, thereby frequently resulting in first pass silicon
success. The Company has also developed, and continues to improve and expand its
own proprietary set of circuit and layout libraries for both standard-cell and
full-custom ICs.
Full-Custom Analog and Mixed-Signal Circuit Design
The Company has developed significant analog and mixed-signal circuit
expertise. The Company has achieved a level of circuit performance in standard
CMOS process technologies that is normally associated with more expensive
special purpose silicon fabrication technologies. All of the Company's
high-performance analog building blocks are implemented in the same low-cost
CMOS technologies as the digital IC circuitry. In addition to achieving very
high performance, the Company's analog-to-digital and digital-to-analog
converters are among the lowest die area devices in the industry, which makes
them well suited for integration into high volume mixed-signal products. The
Company's 10-bit, 50 Msample/sec analog-to-digital converter received the Best
Paper Award of the 1997 International Solid State Circuits Conference, a
prestigious semiconductor conference. This converter was integrated onto the
same die as the Company's broadband QAM receiver, which the Company believes was
the first such mixed-signal QAM receiver product ever demonstrated (BCM3118).
The Company has also developed very high-speed 125 MHz analog-to-digital
converters for Fast Ethernet transceivers and 200 MHz digital-to-analog
converters for cable modulator applications. All of these data converters were
designed for integration with high-speed digital circuits in conventional CMOS
technologies. The Company has also evaluated experimental IC designs and is in
the development phase of producing other analog functions such as low noise RF
amplifiers, linear high-gain RF amplifiers, RF mixers, frequency synthesizers,
RF phase-locked loops and other building blocks to enable higher levels of
system integration.
RESEARCH AND DEVELOPMENT
The Company has assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline.
As of February 28, 1998, approximately 80% of the Company's 166 research and
development engineers had advanced degrees, including 36 with Ph.D.s. These
engineers are involved in advancing the Company's core technologies, as well as
applying these core technologies to the Company's product development activities
in the areas of broadband communications and digital video technology for cable
set-top boxes, cable modems, high-speed networking, DBS and terrestrial digital
broadcast, and xDSL. The transmission solutions for each of these markets
benefit from the same underlying core technologies, which enables the Company to
leverage its ability to address various broadband communications markets with a
relatively focused investment in research and development.
The Company believes that the achievement of higher levels of integration
and the introduction of new products in its target markets is essential to its
growth. As a result, the Company plans to increase research and development
staffing levels in 1998. Research and development expense for 1997, 1996 and
1995 was
37
<PAGE> 40
approximately $16.2 million, $5.7 million and $2.7 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING
Wafer Fabrication
The Company's products are manufactured in standard CMOS processes, which
permit the Company to engage independent silicon foundries to fabricate its ICs.
By subcontracting its manufacturing requirements, the Company is able to focus
its resources on design and test applications where the Company believes it has
greater competitive advantages and to eliminate the high cost of owning and
operating a semiconductor wafer fabrication facility.
The Company's Operations and Quality Engineering Group closely manages the
interface between manufacturing and design engineering. While the Company's
design methodology typically creates smaller than average die for a given
function, it also generates full-custom IC designs. As a result, the Company is
responsible for the complete functional and parametric performance testing of
its devices, including quality. The Company employs a fully staffed operations
and quality organization similar to a vertically integrated semiconductor
manufacturer. The Company arranges with its foundries to have online
work-in-progress control, making the manufacturing subcontracting process
transparent to the Company's customers.
The Company's key silicon foundries are TSMC in Taiwan and Chartered in
Singapore. While the Company currently uses two independent foundries, few of
the Company's components are manufactured at both foundries at any given time.
Any inability of one of its foundries to provide the necessary capacity or
output could result in significant production delays and could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company currently believes it has adequate capacity to
support its current sales levels, the Company continues to work with its
existing foundries to obtain more production capacity and it intends to qualify
new foundries to provide additional production capacity. There can be no
assurance that adequate foundry capacity will be available on acceptable terms,
if at all. See "Risk Factors--Dependence on Independent Foundries."
The Company's foundries currently manufacture all of the Company's products
except for the Company's current MPEG chip, which is presently produced on an
interim basis by another manufacturer. The Company is presently redesigning this
chip to be manufactured at its foundries. The Company has licensed the MPEG
technology from General Instrument and expects to introduce the next generation
of this chip (BCM7010) beginning in the first half of 1998. See "Risk
Factors--Dependence on Development of New Products."
The Company's devices are currently fabricated using CMOS process
technology with 0.5 micron, triple layer metal and 0.35 micron, quad layer metal
feature sizes. The Company continuously evaluates the benefits, on a product by
product basis, of migrating to a smaller geometry process technology in order to
reduce costs. The Company's experience to date with the migration of products to
smaller geometry processes has been favorable, but there can be no assurance
that future process migration will be achieved without difficulty. Other
companies in the industry have experienced difficulty in effecting transitions
to new manufacturing processes and, consequently, have suffered reduced yields
or delays in product deliveries. The Company believes that the transition of its
products to smaller geometries will be important for the Company to remain
competitive. The Company's business, financial condition and results of
operations could be materially and adversely affected if any such transition is
substantially delayed or inefficiently implemented. See "Risk
Factors--Transition to Smaller Geometry Process Technologies."
Assembly and Test
Wafer probe testing is performed by one of the foundries or by the
Company's wafer probe test subcontractors. Following completion of the wafer
probe tests, the die are assembled into packages and the finished products are
tested by one of the Company's two subcontractors: ASAT in Hong Kong and STATS
in Singapore. While the Company has not experienced any material disruption in
supply from assembly subcontractors to date, there can be no assurance that
assembly problems will not occur in the future. See "Risk Factors--Dependence on
Third-Party Subcontractors for Assembly and Test."
38
<PAGE> 41
Quality Assurance
The data communications industry demands high-quality and reliability of
the semiconductors incorporated into their equipment. The Company focuses on
product reliability from the initial stage of the design cycle through each
specific design process, including layout and production test design. In
addition, the Company's designs are subjected to in-depth circuit simulation at
temperature, voltage and processing extremes before being committed to silicon.
The Company prequalifies each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. The Company also participates in
quality and reliability monitoring through each stage of the production cycle by
reviewing electrical and parametric data from its wafer foundry and assembly
subcontractors. The Company closely monitors wafer foundry production to ensure
consistent overall quality, reliability and yield levels. In cases where the
Company purchases wafers on a fixed cost basis, any improvement in yields can
reduce the Company's cost per IC.
As part of its total quality program, the Company plans to apply for ISO
9001 certification, a comprehensive International Standards Organization
specified quality system. The Company's objective is to exceed ISO 9001
requirements, especially in the areas of continuous improvements and customer
satisfaction. All of the Company's principal independent foundries and package
assembly facilities have achieved ISO 9000 certification.
SALES AND MARKETING
The Company's sales and marketing strategy is to achieve design wins with
technology leaders in each of the Company's targeted broadband communications
markets by, among other things, providing superior field application and
engineering support. The Company markets and sells its products in the United
States through a direct sales force, which has largely been established within
the last year, based out of four regional sales offices located in Irvine and
San Jose, California, Atlanta, Georgia and Garwood, New Jersey. Sales managers
are dedicated to principal customers to promote close cooperation and
communication. The Company also provides its customers with reference platform
designs, which enable its customers to achieve easier and faster transitions
from the initial prototype designs through final production releases and
significantly enhance the customer's confidence that the Company's products will
meet their market requirements and product introduction schedules.
The Company also markets and sells its products internationally through a
direct sales force based out of regional sales offices located in Singapore and
the Netherlands, as well as through a network of independent distributors and
representatives in France, Israel, Germany, Japan, Taiwan and Korea. The Company
selects these independent entities based on their ability to provide effective
field sales, marketing communications and technical support to the Company's
customers. All international sales to date have been denominated in U.S.
dollars.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. The Company
believes that the principal factors of competition for silicon providers to
these industries are product capabilities, level of integration, reliability,
price, time-to-market, system cost, intellectual property, customer support and
reputation. The Company believes it competes favorably with respect to each of
these factors.
The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial digital broadcast, and xDSL, which
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
set-top box market with Rockwell, Philips, LSI Logic and VLSI Technologies for
communication devices and with SGS-THOMSON, LSI
39
<PAGE> 42
Logic and C-Cube in the MPEG segment. The Company expects other major
semiconductor manufacturers to enter the market as digital broadcast television
and other digital cable television markets become more established. A number of
companies, including LSI Logic, Rockwell and Toshiba, have announced that they
are developing and will introduce MCNS/DOCSIS compliant products in 1998, which
could result in significant competition in the cable modem market. In the
high-speed networking market, the Company principally competes with established
suppliers including Lucent Technologies, Level One, National Semiconductor and
AMD. The Company's principal competitors in the DBS market include LSI Logic,
Philips, SGS Thomson and VLSI Technologies. The Company's principal competitors
in the xDSL market include Analog Devices, Alcatel, Motorola and Globespan. The
Company also may face competition from suppliers of products based on new or
emerging technologies.
Many of the Company's competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than the Company. As a result, such competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the promotion and sale of their
products than the Company. Current and potential competitors have established or
may establish financial or strategic relationships among themselves or with
existing or potential customers, resellers or other third parties. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share. In addition, the Company's
competitors may in the future develop technologies which more effectively
address the transmission of digital information through existing analog
infrastructures at a lower cost. There can be no assurance that the Company will
be able to compete successfully against current or potential competitors, or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company's success and future revenue growth will depend, in part, on
its ability to protect its intellectual property. The Company relies primarily
on patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's intellectual property. The Company has been issued
two United States patents and has filed nine United States patent applications.
There can be no assurance that any patent will issue as a result of these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented, or that any right granted thereunder would provide
meaningful protection to the Company. The failure of any patents to provide
protection to the Company's technology would make it easier for the Company's
competitors to offer similar products. The Company also generally enters into
confidentiality agreements with its employees and strategic partners, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products, services
or technology without authorization, develop similar technology independently or
design around the Company's patents. In addition, effective copyright, trademark
and trade secret protection may be unavailable or limited in certain foreign
countries. Certain of the Company's customers have entered into agreements with
the Company pursuant to which such customers have the right to use the Company's
proprietary technology in the event the Company defaults in its contractual
obligations, including product supply obligations, and fails to cure the default
within a specified period of time. Moreover, the Company often incorporates the
intellectual property of its strategic customers into its designs, and the
Company has certain obligations with respect to the non-use and non-disclosure
of such intellectual property. There can be no assurance that the steps taken by
the Company to prevent misappropriation or infringement of the intellectual
property of the Company or its customers will be successful. Moreover,
litigation may be necessary in the future to enforce the intellectual property
rights of the Company or its customers, to protect the Company's trade secrets
or to determine the validity and scope of proprietary rights of others,
including its customers. Such litigation could result in substantial costs and
40
<PAGE> 43
diversion of the Company's resources and could have a material adverse affect on
the Company's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement of other parties' proprietary rights. The Company has received a
letter from counsel for BroadCom, Inc. asserting rights in the "Broadcom"
trademark and demanding that the Company cease and desist from any further use
of the Broadcom name. The Company has responded to such counsel in a letter
asserting ownership of a valid registered trademark for the Broadcom name and
requesting further information. In addition, the Company is currently involved
in litigation with STI concerning the Company's alleged infringement of one of
STI's patents by one of the Company's modem products. There can be no assurance
that the Company will prevail in this action, or that other actions alleging
infringement by the Company of third-party patents or invalidity of the patents
held by the Company will not be asserted or prosecuted against the Company, or
that any assertions of infringement or prosecutions seeking to establish the
invalidity of Company-held patents will not materially and adversely affect the
Company's business, financial condition and results of operations. For example,
in a patent or trade secret action, an injunction could issue against the
Company requiring that the Company withdraw certain products from the market or
necessitating that certain products offered for sale or under development be
redesigned. The Company has also entered into certain indemnification
obligations in favor of its customers and strategic partners that could be
triggered upon an allegation or finding of the Company's infringement of other
parties' proprietary rights. Irrespective of the validity or successful
assertion of such claims, the Company would likely incur significant costs and
diversion of its resources with respect to the defense of such claims, which
could also have a material adverse effect on the Company's business, financial
condition and results of operations. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all. See "--Legal Proceedings."
EMPLOYEES
As of February 28, 1998, the Company had 238 full-time employees and 19
contract employees, including 172 employees engaged in research and development,
34 engaged in sales and marketing, 26 engaged in manufacturing operations and 25
engaged in general administration activities. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.
PROPERTIES
The Company leases three facilities in Irvine, California, which have
approximately 17,000 square feet, 26,300 square feet and 15,850 square feet
pursuant to three leases which expire in July 2000, December 1998 and February
1999, respectively. The Company also leases an additional 1,700 square feet in
Irvine, California on a month-to-month basis. These four facilities comprise the
Company's corporate headquarters and include the Company's administration, sales
and marketing, and research and development departments. Pursuant to its lease
that expires in February 1999, the Company has also agreed to lease an
additional 15,850 square feet in Irvine, California by August 1998 to expand its
corporate headquarters. In addition to these facilities, the Company is seeking
to lease approximately 100,000 additional square feet. The Company believes that
suitable additional space will be available on commercially reasonable terms.
The Company also leases a 9,400 square foot facility in Atlanta, Georgia,
which houses the Company's Residential Broadband Business Unit. This lease
terminates in May 2002. In addition, the Company leases a 2,600 square foot
facility in San Jose, California on a month-to-month basis for the Company's
Digital Video Technology Group. The Company believes its current facilities,
together with its planned expansion, will be adequate through 1998.
41
<PAGE> 44
LEGAL PROCEEDINGS
In December 1996, STI filed an action against the Company in the United
States District Court for the Northern District of California alleging that the
Company's BCM3036 Universal QPSK/QAM burst modulator used in modems infringed
one of STI's patents (the " '352 Patent"). The BCM3036 accounted for
approximately 1.2% of the Company's total revenue in 1997. The complaint seeks
an injunction directed against one of the Company's modem products, as well as
the recovery of monetary damages, including treble damages for willful
infringement. The Company has filed an answer and affirmative defenses to STI's
complaint, denying the allegations in STI's complaint, and has asserted a
counterclaim requesting declaratory relief that the Company is not infringing
the '352 Patent and that the '352 Patent is invalid and unenforceable. The
Company believes that it has strong defenses to STI's claims on both invalidity
and noninfringement grounds. The Company and STI are currently conducting
discovery in this case. A claims construction hearing in this case has been
scheduled for April 1998. The Company has received an invalidity opinion from
outside counsel with respect to the '352 Patent, upon which the Company is
relying or may rely to support its defense to STI's allegation of willful
infringement. Although the Company believes that it has strong defenses, a
finding of infringement by the Company in this action could lead to liability
for monetary damages (which could be trebled in the event that the infringement
were found to have been willful), the issuance of an injunction requiring that
the Company withdraw various modem products from the market, substantial product
redesign expenses (assuming that a non-infringing design is feasible and
economic) and associated time-to-market delays, and indemnification claims by
the Company's customers or strategic partners, each of which events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. These
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging it "illegally pirated" Sarnoff's employees. The complaint seeks
to preliminarily and permanently enjoin the Company and the Former Employees
from utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their statutory and contractual duties of
confidentiality to Sarnoff by precluding them from working for six months in any
capacity relating to certain of the Company's programs. The Company has filed an
answer and is vigorously defending itself in this action. In May 1997, the Court
denied Sarnoff's request for a temporary restraining order.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court, Central District of California, and
was stayed pending resolution of the New Jersey action described in the
preceding paragraph. Notwithstanding that the California action is currently
stayed, the Company believes that it involves facts, circumstances and claims
unrelated to those at issue in the New Jersey action, and the Company intends to
vigorously prosecute the California action against Sarnoff.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The Company and RSSI have executed a
settlement agreement in this action, pursuant to which the Company has agreed
not to hire or extend an offer to any employees from RSSI for 30 days following
the consummation of this offering.
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<PAGE> 45
While the settlement agreement requires RSSI to dismiss this action without
prejudice, it does not release any claims that RSSI may assert in the future
regarding the actual use or misappropriation by the Company of trade secrets or
other proprietary information of RSSI.
In March 1998, Scott Davis, the Company's former Chief Financial Officer,
filed a complaint in California Superior Court against the Company and its Chief
Executive Officer, Henry T. Nicholas, III, alleging claims for fraud and deceit,
negligent misrepresentation, breach of contract, breach of fiduciary duty,
constructive fraud, conversion and breach of the implied covenant of good faith
and fair dealing. These claims relate to Mr. Davis' alleged ownership of 26,000
shares of Series D Preferred Stock originally purchased by Mr. Davis in February
1996 (which shares would be convertible into 78,000 shares of Class B Common
Stock). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and declaratory relief. The Company is preparing an answer
to Mr. Davis' complaint, which will be filed in the near future. If Mr. Davis is
successful in his claim, he may be entitled to certain rights as a holder of
Series D Preferred Stock. See Note 5 of Notes to Financial Statements.
Any results of litigation are inherently uncertain, and there can be no
assurance that the Company will prevail in any of these lawsuits. Any suit or
proceeding involving the Company or its intellectual property could be costly,
could result in a diversion of management's efforts and could prohibit the
Company from marketing such technology without a license, which license may not
be available on acceptable terms, if at all. Any of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Intellectual Property" and "Risk Factors--Risks
Associated with Intellectual Property Protection."
43
<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their ages as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D. .......... 38 Co-Chairman, President and Chief Executive Officer
Henry Samueli, Ph.D..................... 43 Co-Chairman, Vice President of Engineering and Chief
Technical Officer
William J. Ruehle....................... 55 Vice President, Chief Financial Officer and Secretary
Timothy M. Lindenfelser................. 37 Vice President of Marketing
Martin J. Colombatto.................... 39 Vice President and General Manager, Networking
Business Unit
Vahid Manian............................ 37 Vice President of Manufacturing Operations
Aurelio E. Fernandez.................... 43 Vice President of Worldwide Sales
Nariman Yousefi......................... 35 Director of Engineering, Networking Business Unit
Steve K. Tsubota........................ 39 Director of Cable-TV Business Unit
Charles P. Reames, Ph.D................. 40 Director of Cable and Satellite Systems
Myron S. Eichen(2)...................... 69 Director
Alan E. Ross(1)(2)...................... 63 Director
Werner F. Wolfen(1)..................... 67 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Henry T. Nicholas, III, co-founded the Company and has served as its
President, Chief Executive Officer and Co-Chairman since the Company's
inception. From 1988 through 1991, Dr. Nicholas was first a consultant and then
the Director of Microelectronics for PairGain Technologies, Inc. ("PairGain"), a
telecommunications equipment manufacturer, and was the founder of PairGain's
microelectronics organization. Prior to joining PairGain, Dr. Nicholas held
various senior management positions with the Microelectronics Center of TRW,
Inc. ("TRW") between 1982 and 1989. Dr. Nicholas attended the United States Air
Force Academy, and received a B.S., M.S. and Ph.D. in Electrical Engineering
from the University of California, Los Angeles.
Henry Samueli co-founded the Company and has served as its Co-Chairman,
Vice President of Engineering and Chief Technical Officer since the Company's
inception. Since 1985, Dr. Samueli has also been a professor in the Electrical
Engineering Department at the University of California, Los Angeles, where he
supervises advanced research programs in broadband communications circuits and
has published more than 100 papers on the subject. Dr. Samueli was the Chief
Scientist and one of the founders of PairGain and he consulted for PairGain from
1988 to 1994. From 1980 until 1985, Dr. Samueli was employed in various
engineering management positions in the Electronics and Technology Division of
TRW. Dr. Samueli received a B.S., M.S. and Ph.D. in Electrical Engineering from
the University of California, Los Angeles.
William J. Ruehle has served as the Company's Vice President and Chief
Financial Officer since joining the Company in June 1997. Mr. Ruehle was
employed by SynOptics Communications, Inc. as Vice President and Chief Financial
Officer from 1987 until the merger with Wellfleet Communications Incorporated in
1994 that created Bay Networks, Inc. ("Bay Networks"), a networking
communications company. Following the merger, Mr. Ruehle was promoted to
Executive Vice President and served as Chief Financial Officer of Bay Networks
until January 1997. Mr. Ruehle received a B.A. in Economics from Allegheny
College and an M.B.A. from Harvard Business School.
Timothy M. Lindenfelser has served as the Company's Vice President of
Marketing since joining the Company in February 1994. During the past four years
until December 1997, Mr. Lindenfelser also served as
44
<PAGE> 47
Vice President of Worldwide Sales. Prior to joining the Company, Mr.
Lindenfelser was employed by Brooktree Corporation, a semiconductor
manufacturer, from November 1988 until February 1994, where he was responsible
for all marketing and new business development for the Communications Strategic
Business Unit. Mr. Lindenfelser received a B.S.E.E. from the University of
Minnesota and an M.B.A. from the University of San Diego.
Martin J. Colombatto joined the Company in July 1996 as its Director of
Marketing for Broadband Access, and became the Vice President and General
Manager of the Networking Business Unit in December 1997. Prior to joining the
Company, Mr. Colombatto held various sales positions with LSI Logic Corp., a
semiconductor manufacturer, including Director, North American Sales
Communication Segment, from August 1995 to July 1996; Director, European Sales
Communication and Consumer Segment, from April 1992 to July 1995; and Regional
Sales Manager from August 1987 to June 1992. Mr. Colombatto received a B.S. from
the California Polytechnic University, Pomona.
Vahid Manian joined the Company in January 1996 as its Director of
Operations and became the Vice President of Manufacturing Operations in December
1997. Prior to joining the Company, Mr. Manian served as the Director of
Operations at Silicon Systems, Inc. from November 1983 to January 1996, where he
led the implementation, production ramp and qualification of advanced PRML-read
channel ICs. Mr. Manian received a B.S.E.E. and an M.B.A. from the University of
California, Irvine.
Aurelio E. Fernandez has served as the Vice President of Worldwide Sales
since joining the Company in December 1997. From November 1996 to December 1997,
Mr. Fernandez served as the Senior Vice President of Sales at Exar Corporation,
a semiconductor manufacturer. From November 1994 to November 1996, Mr. Fernandez
served as the Senior Vice President of Sales at ICWorks, Inc., a semiconductor
manufacturer. Prior to that, Mr. Fernandez served in a number of positions, most
recently as Vice President of Telecom Sales, at VLSI Technology, Inc., a
semiconductor manufacturer. Mr. Fernandez received a B.S.E.E. from the
University of Florida and an M.B.A. from Florida Atlantic University.
Nariman Yousefi joined the Company in March 1994 as the Director of the
Networking Business Unit. Prior to joining the Company, he served as an
Engineering Manager at Standard Microsystems Corporation, a networking equipment
manufacturer, from 1991 to 1994. From 1988 to 1991, he held various engineering
positions at Western Digital Corporation, a disk drive manufacturer, and from
1984 to 1988 he led mixed-signal chip development at Silicon Systems, a
semiconductor company. Mr. Yousefi received his B.S.E.E. from the University of
California, Davis and an M.S.E.E. from the University of Southern California.
Steve K. Tsubota joined the Company in March 1995 as its Director of the
Cable-TV Business Unit. Prior to joining the Company, Mr. Tsubota served as
Director of Product Marketing of Summit Design, Inc., an EDA company, from
February 1994 to February 1995. From February 1991 to January 1994, he served as
the Marketing Manager for the IC Group of Mentor Graphics Corporation, an EDA
company, and from June 1985 to March 1990, Mr. Tsubota held various marketing,
sales and engineering positions at Silicon Compiler Systems Corporation, an EDA
company. Mr. Tsubota received a B.S.E.E. and M.S.E.E. from the University of
California, Los Angeles.
Charles P. Reames joined the Company in June 1993 as its Director of Modem
Technology and most recently as the Director of Cable and Satellite Systems
since October 1995. Prior to joining the Company, Dr. Reames served in various
engineering positions in the Electronics and Technology Division of TRW from
June 1985 through June 1993. Dr. Reames received a B.S. in Engineering from the
California Institute of Technology and an M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
Myron S. Eichen has served as an advisor to the Board of Directors since
1994. Mr. Eichen has served as a director of the Company since February 1998.
Mr. Eichen is presently a director of Rokenbok Toy Company and has founded and
served as a director for a number of companies including Brooktree Corporation
(now a division of Rockwell International), a semiconductor manufacturer, and
Proxima Corporation, an equipment manufacturer.
Alan E. Ross has been a director of the Company since November 1995. Mr.
Ross is a Board member of several companies in the semiconductor industry,
including World Wide Semiconductor Manufacturing
45
<PAGE> 48
Corporation, Gambit Automated Design, Inc., Artest Corporation, and ADC
Telecommunications, Inc. In addition, Mr. Ross served as President of Rockwell
Semiconductor Systems, Inc. from 1988 to 1996.
Werner F. Wolfen has been a director of the Company since July 1994, when
he joined the Board of Directors as the nominee of a group of investors. Mr.
Wolfen is a Senior Partner of the law firm of Irell & Manella LLP ("Irell &
Manella") and was Co-Chairman of the firm's Executive Committee from 1982 to
1992. Irell & Manella has represented and continues to represent the Company in
various transactional and litigation matters. Mr. Wolfen received a J.D. from
the University of California Boalt Hall School of Law in 1953.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding the Company's
compensation policies and all forms of compensation to be provided to executive
officers and directors of the Company, including, among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1998 Stock
Incentive Plan. The current members of the Compensation Committee are Messrs.
Ross and Eichen.
Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company, including, among other things, the Company's internal audit and
control functions, the results and scope of the annual audit and other services
provided by the Company's independent auditors and the Company's compliance with
legal matters that have a significant impact on the Company's financial reports.
The Audit Committee also consults with the Company's management and the
Company's independent auditors prior to the presentation of financial statements
to shareholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent auditors. The current members of
the Audit Committee are Messrs. Ross and Wolfen.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive cash compensation for their service
as directors. Each new nonemployee Director typically will receive an option to
purchase 15,000 shares of Class A Common Stock upon joining the Board of
Directors. Each incumbent director will be granted an option to purchase an
additional 3,000 shares of Class A Common Stock annually. See
"Management--Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Ross and Eichen. No interlocking relationship exists between any member
of the Company's Board of Directors or the Compensation Committee and any member
of the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
None of the Company's executive officers have employment agreements with
the Company. Accordingly, the employment of any such executive officer may be
terminated at any time at the discretion of the Board of Directors.
46
<PAGE> 49
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1997 all
compensation received for services rendered to the Company in all capacities by
the Company's Chief Executive Officer and the only other executive officer of
the Company whose salary plus bonus exceeded $100,000 in 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY OPTIONS
---------------------------- ------------ ------------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D................................ $165,000(1) 375,000
Co-Chairman, President and
Chief Executive Officer
Henry Samueli, Ph.D. ....................................... 165,000(1) 375,000
Co-Chairman, Vice President of
Engineering and Chief Technical Officer
</TABLE>
- ------------
(1) Effective January 1, 1998, the annual salaries of Dr. Nicholas and Dr.
Samueli were each reduced to $110,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE
-------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED EXERCISE TERM(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED IN 1997 PER SHARE DATE 5% 10%
---- ----------- ---------------- ---------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D..................... 375,000(2) 7.0% $1.25(3) 06/22/07 $221,494 $630,348
Henry Samueli, Ph.D........ 375,000(2) 7.0 1.25(3) 06/22/07 221,494 630,348
</TABLE>
- ------------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission (the "Commission") and
do not represent the Company's estimate or projection of the future trading
prices of its Common Stock. There can be no assurance that any of the values
reflected in this table will be achieved. Actual gains, if any, on stock
option exercises are dependent on numerous factors, including the future
performance of the Company, overall conditions and the option holder's
continued employment with the Company throughout the entire vesting period
and option term, which factors are not reflected in this table.
(2) Options were granted on June 23, 1997 under the Company's Amended and
Restated 1994 Stock Option Plan and are immediately exercisable. All of the
shares of Common Stock that are issuable upon exercise of unvested options
are subject to repurchase by the Company. The shares underlying the options
vest and the Company's repurchase right lapses in 48 equal monthly
installments commencing January 1, 1998.
(3) The exercise price is equal to 110% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
47
<PAGE> 50
AGGREGATED OPTIONS EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Executive Officers concerning unexercised options held as of December 31, 1997.
No options were exercised during the last fiscal year by any of the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D............ 375,000 -- $2,531,250 --
Henry Samueli, Ph.D..................... 375,000 -- 2,531,250 --
</TABLE>
- ------------
(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($8.00 per share,
as determined by the Board of Directors) and the exercise price of such
options ($1.25 per share).
EMPLOYEE BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to
serve as the successor equity incentive program to the Company's 1994 Amended
and Restated Stock Option Plan (the "1994 Plan") and the Company's 1998 Special
Stock Option Plan (the "Special Plan"). The 1998 Plan was adopted by the Board
of Directors and the shareholders of the Company in February 1998 (the "Plan
Effective Date"). A total of 16,115,343 shares of Common Stock have been
authorized for issuance under the 1998 Plan. Such share reserve consists of (i)
the number of shares which remain available for issuance under the 1994 Plan and
the Special Plan on the Plan Effective Date, including the shares subject to
outstanding options, and (ii) an additional increase of 3,000,000 shares of
Class A Common Stock. To the extent any unvested shares of Class B Common Stock
issued under the 1994 Plan or the Special Plan are repurchased by the Company
after the Plan Effective Date, at the exercise price paid per share, in
connection with a shareholder's termination of service, those repurchased shares
will be added to the reserve of Class A Common Stock available for issuance
under the 1998 Plan. In addition, the number of shares of Class A Common Stock
reserved for issuance under the 1998 Plan will automatically increase on the
first trading day of each calendar year, beginning in calendar year 1999, by an
amount equal to 3% percent of the total number of shares of Common Stock
outstanding on the last trading day of the immediately preceding calendar year.
In no event, however, may any one participant in the 1998 Plan receive option
grants, separately exercisable stock appreciation rights or direct stock
issuances for more than 1,500,000 shares of Class A Common Stock in the
aggregate per calendar year.
On the date the Underwriting Agreement in this offering is executed (the
"Underwriting Date"), outstanding options under the 1994 Plan and the Special
Plan will be incorporated into the 1998 Plan, and no further option grants will
be made under the 1994 Plan or the Special Plan. The incorporated options will
continue to be governed by their existing terms, unless the Plan Administrator
elects to extend one or more features of the 1998 Plan to those options. Except
as otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option Grant
Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class A Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition
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<PAGE> 51
of special below-market stock option grants, (iii) the Stock Issuance Program
under which such individuals may, at the Plan Administrator's discretion, be
issued shares of Class A Common Stock directly, through the purchase of such
shares at a price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the performance of services, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Class A Common Stock at an exercise price equal to 100% of their fair market
value on the grant date and (v) the Director Fee Option Grant Program which may,
in the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the retainer fee otherwise payable to them in
cash each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Option Committee except with respect to officers and
directors subject to Section 16 of the Securities and Exchange Act of 1934
("Section 16 executives"). The Option Committee as Plan Administrator will have
complete discretion to determine which eligible individuals are to receive
option grants or stock issuances under those programs, the time or times when
such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The Compensation Committee will administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 executives and will
also have the exclusive authority to select the executive officers and other
highly compensated employees who may participate in the Salary Investment Option
Grant Program in the event that program is activated for one or more calendar
years, but neither the Compensation Committee nor the Option Committee nor the
Board will exercise any administrative discretion with respect to the option
grants made under the Salary Investment Option Grant Program or under the
Automatic Option Grant and Director Fee Option Grant Programs for the
non-employee Board members. All grants under those three latter programs will be
made in strict compliance with the express provisions of each such program.
The exercise price for the shares of Class A Common Stock subject to option
grants made under the 1998 Plan may be paid in cash or in shares of Class A
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1994 Plan and the Special Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based on the fair market value per share of Class A
Common Stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Class A Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such shares. Such appreciation distribution may be
made in cash or in shares of Class A Common Stock. None of the incorporated
options from the 1994 Plan or the Special Plan contain any stock appreciation
rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
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<PAGE> 52
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated upon similar terms and conditions. The Plan Administrator
will also have the authority to grant options which will immediately vest upon
an acquisition of the Company, whether or not those options are assumed by the
successor corporation. The Plan Administrator is also authorized under the
Discretionary Option Grant and Stock Issuance Programs to grant options and to
structure repurchase rights so that the shares subject to those options or
repurchase rights will immediately vest in connection with a change in control
of the Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period following
such change in control. The options incorporated from the 1994 Plan and the
Special Plan will immediately vest in full upon an acquisition of the Company by
merger or asset sale, unless those options are assumed by the successor entity.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each director,
executive officer and other highly compensated employee of the Company selected
for participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Class A Common Stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of Class A Common Stock on the
grant date. The option will be exercisable at a price per share equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the amount of salary invested
in that option. The option will vest in a series of twelve successive equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual on the Board at
the Underwriting Date or who first becomes a non-employee Board member at any
time after the Underwriting Date will automatically receive an option grant for
40,000 shares of Class A Common Stock at the Underwriting Date or on the date
such individual joins the Board, provided such individual has not been in the
prior employ of the Company. In addition, on the date of each Annual
Shareholders Meeting held after the Plan Effective Date, each non-employee Board
member who is to continue to serve as a non-employee Board member will
automatically be granted an option to purchase 3,000 shares of Class A Common
Stock, provided such individual has served on the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 40,000 share automatic option grant will vest in
a series of four successive equal annual installments upon the individual's
completion of each year of Board service over the four year period measured from
the option grant date. Each annual 3,000 share automatic option grant will vest
upon the individual's completion of one year of Board service measured from the
grant date. However, the shares subject to each automatic grant will immediately
vest in full upon certain changes in control or ownership of the Company or upon
the optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option
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<PAGE> 53
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of Class
A Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the portion of the
retainer fee invested in that option. The option will become exercisable for the
option shares in a series of twelve successive equal monthly installments over
the calendar year for which the election is to be in effect. However, the option
will become immediately exercisable for all the option shares upon (i) certain
changes in the ownership or control of the Company or (ii) the death or
disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Class A Common Stock paid in connection
with the tender offer over (ii) the exercise price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required shareholder approval. The 1998 Plan will terminate on the earliest of
(i) January 31, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
As of March 18, 1998, options to purchase 6,478,940 shares of Class B
Common Stock were outstanding under the Predecessor Plan at a weighted average
exercise price of $3.57 per share.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders in February 1998 and will
become effective immediately upon the execution of the Underwriting Agreement
for this offering. The Purchase Plan is designed to allow eligible employees of
the Company and participating subsidiaries to purchase shares of Class A Common
Stock, at semi-annual intervals, through their periodic payroll deductions under
the Purchase Plan, and a reserve of 750,000 shares of Class A Common Stock has
been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in April 2000. The next offering period
will commence on the first business day in May 2000, and subsequent offering
periods will commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than five calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date. Individuals who become eligible employees
after the start date of the offering period may join the Purchase Plan on any
subsequent semi-annual entry date within that offering period.
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<PAGE> 54
Payroll deductions may not exceed 15% of total compensation, and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in April and October each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Class A Common
Stock on the participant's entry date into the offering period or (ii) the fair
market value on the semi-annual purchase date. In no event, however, may any one
participant purchase more than 1,500 shares, nor may all participants in the
aggregate purchase more than 150,000 shares on any one semi-annual purchase
date.
Should the fair market value per share of Class A Common Stock on any
purchase date be less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Class A Common Stock on
the participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Class A Common Stock
immediately prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008, (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.
401(k) Profit Sharing Plan
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to
20% of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limit. At the Company's discretion, the Company may make matching
contributions to the 401(k) Plan. To date, the Company has not made any matching
contributions under the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Law concerning contacts
or transactions between the Company and a director, or (vii) under Section 316
of the California Law concerning directors' liability for improper dividends,
loans and guarantees. The limitation of liability does not affect the
availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation by a director of the director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law) through bylaw provisions, by agreement or
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otherwise, to the fullest extent permitted by law. Pursuant to this provision,
the Company's Bylaws provide for indemnification of the Company's directors,
officers and employees. In addition, the Company may, at its discretion, provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to indemnify these directors or executive officers (other than for
liability resulting from willful misconduct of a culpable nature), to advance
expenses to them as they are incurred, provided that they undertake to repay the
amount advanced if it is ultimately determined by a court that they are not
entitled to indemnification, and to obtain directors' and officers' insurance if
available on reasonable terms. Section 317 of the California Law and the
Company's Bylaws make provision for the indemnification of officers, directors
and other corporate agents in terms sufficiently broad to indemnify such
persons, under certain circumstances, for liabilities (including reimbursement
of expense incurred) arising under the Securities Act. The Company is not aware
of any pending litigation or proceeding involving any director, officer,
employee or agent of the Company in which indemnification will be required or
permitted. Moreover, the Company is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. The Company
believes that the foregoing indemnification provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
The Company, with the approval of its Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.
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CERTAIN TRANSACTIONS
Since January 1, 1995, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the amount
involved exceeded or exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of any class of the Company's voting securities,
or any member of the immediate family of any of the foregoing persons had or
will have a direct or indirect material interest, other than the transactions
described below.
Series D Preferred Stock Financing. In February 1996, the Company issued
and sold an aggregate of 493,839 shares of convertible Series D Preferred Stock
for an aggregate purchase price of $2,963,034 or $6.00 per share. The investors
in such shares included, among others, (1) Werner F. Wolfen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock,
(2) Alan E. Ross, a director of the Company, who purchased 5,000 shares of
convertible Series D Preferred Stock, (3) Myron S. Eichen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock and
(4) a trust controlled by Leon M. Samueli and Barbara Jane Samueli, relatives of
Henry Samueli (the Company's Co-Chairman, Vice President of Engineering and
Chief Technical Officer), which purchased 30,000 shares of convertible Series D
Preferred Stock. Upon the consummation of this offering, each share of
convertible Series D Preferred Stock will automatically convert into three
shares of the Company's Class B Common Stock.
Series E Preferred Stock Financing. In September 1997, the Company issued
and sold 1,500,000 shares of convertible Series E Preferred Stock to General
Instrument for an aggregate purchase price of $22,725,000 or $15.15 per share
(the "Series E Financing"). Upon the consummation of this offering, each share
of convertible Series E Preferred Stock will automatically convert into 1.5
shares of the Company's Class B Common Stock. In connection with the Series E
Financing, General Instrument and the Company entered into a Development, Supply
and License Agreement, pursuant to which, among other things, the Company has
agreed to supply to General Instrument, and General Instrument has agreed to
purchase from the Company, a specified percentage of General Instrument's
silicon requirements for its digital cable set-top box subscriber products. For
1997, the Company's sales to General Instrument (and its subcontractor) were
approximately $11.8 million, or 31.9% of total revenue. See "Business--Customers
and Strategic Relationships."
Development Agreement with Cisco Systems. Effective September 1996, the
Company entered into a development agreement with Cisco Systems, pursuant to
which the Company granted to Cisco Systems an option to purchase shares of the
Company's Class A Common Stock at the Net Price. Cisco Systems exercised this
option and will purchase 500,000 shares at the closing of this offering in a
concurrent non-underwritten registered offering. In addition, Cisco Systems has
agreed that it will be subject to certain restrictions following this offering,
including (1) a one-year lock-up period during which the shares purchased by
Cisco Systems cannot be transferred, (2) a restriction on selling more than a
certain number of shares per quarter during the first year following termination
of the initial one-year lock-up period, (3) a notification obligation should
Cisco Systems desire to sell more than a specified number of shares after the
one-year lock-up period, (4) a three-year standstill agreement preventing Cisco
Systems from acquiring more than 10% of the Company's Common Stock, and (5) a
seven-year voting agreement with respect to certain matters, which agreement
includes an obligation to vote its shares in favor of all directors nominated by
the Board of Directors of the Company. Some of these restrictions may terminate
early upon certain events, such as an acquisition of the Company. For 1997, the
Company's sales to Cisco Systems were approximately $2,000,000, or 5.4% of total
revenue. See "Business--Customers and Strategic Relationships" and "Sale of
Shares to Cisco Systems."
Sale of Common Stock to Irell & Manella. Pursuant to an agreement dated as
of October 31, 1997, the Company issued and sold 225,000 shares of Class B
Common Stock to Irell & Manella for an aggregate purchase price of $1,050,000 or
$4.67 per share. Werner F. Wolfen, a director of the Company, is a Senior
Partner of Irell & Manella.
Engagement Agreement with Irell & Manella. Irell & Manella has represented
and continues to represent the Company in various legal matters pursuant to an
engagement agreement dated as of January 1,
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1997, and amended as of January 1, 1998. Under the engagement agreement, the
Company has agreed to pay Irell & Manella a fixed fee plus costs for the firm's
legal services rendered from and after January 1, 1998 with respect to certain
litigation matters. Irell & Manella has agreed to render legal services to the
Company on most other matters at reduced rates from the firm's standard rates
for the two-year period commencing January 1, 1998. During 1997, the Company
paid approximately $1.2 million to Irell & Manella for legal services rendered
by that firm.
Officer Promissory Notes. Between March 1995 and December 1997, the Company
entered into full-recourse promissory notes with certain of its officers and
directors to finance the purchase of Class B Common Stock upon exercise of stock
options. See "Management--Executive Compensation" and "Employee Benefit
Plans--1998 Stock Incentive Plan." All of the notes are full-recourse, secured
by the shares purchased and are due and payable upon the earlier of the stated
due date or thirty days (ninety days in the case of Mr. Ruehle) after the
termination of such officer's employment with the Company. In July 1997, in
connection with the exercise of a stock option, William J. Ruehle, the Chief
Financial Officer of the Company, delivered a $467,500 full-recourse promissory
note to the Company. Such note bears interest at 6.5% per annum and is due in
July 2002. The Company has agreed to pay Mr. Ruehle the amount necessary to
compensate him for the interest expense. In December 1997, in connection with
the exercise of a stock option, Aurelio E. Fernandez, Vice President of
Worldwide Sales, delivered a $1,800,000 full-recourse promissory note to the
Company that is due in December 2002. Mr. Fernandez will be deemed to have paid
interest with respect to such note at the applicable federal rate, 6.5% per
annum at December 31, 1997. In addition, in January 1998, Mr. Fernandez
delivered a $130,000 full-recourse promissory note to the Company. Such note
bears interest at 6.5% per annum and is due in January 2002. This loan was made
to Mr. Fernandez to allow him to pay off a similar loan from his prior employer
that became due when he left that company.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of December 31, 1997
regarding beneficial ownership of the Company's Common Stock, as adjusted to
reflect the sale of 3,500,000 shares of Class A Common Stock offered hereby and
500,000 shares of Class A Common Stock to Cisco Systems concurrent with this
offering, by (i) each person (or group of affiliated persons) known by the
Company to own beneficially more than 1,000,000 shares of Class B Common Stock
or 5% of the Class A Common Stock, (ii) each of the Company's directors and
Named Executive Officers, (iii) the Company's directors and executive officers
as a group and (iv) all other Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES OF OWNED AFTER OFFERING
------------------------------------- CLASS A -------------------------------------
NUMBER OF NUMBER OF PERCENT OF COMMON NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL VOTING STOCK CLASS A CLASS B TOTAL VOTING
NAME OF BENEFICIAL OWNERS SHARES SHARES POWER(1) OFFERED(2) SHARES SHARES POWER(1)
------------------------- --------- ---------- ------------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D.(3)...................... -- 11,475,000(4) 28.5% 290,000 -- 11,185,000 28.0%
Henry Samueli, Ph.D.(3)(5)...... -- 11,475,000(4) 28.5 290,000 -- 11,185,000 28.0
Werner F. Wolfen................ -- 550,632(6) 1.4 -- -- 550,632 1.4
Myron S. Eichen................. -- 345,351 * -- -- 345,351 *
Alan E. Ross.................... -- 105,000 * -- -- 105,000 *
General Instrument
Corporation(7)................ -- 2,250,000 5.6 -- -- 2,250,000 5.7
Intel Corporation............... -- 1,576,800 3.9 -- -- 1,576,800 4.0
Scientific-Atlanta, Inc......... -- 1,500,000 3.8 -- -- 1,500,000 3.8
Cisco Systems, Inc.(8).......... 500,000 -- * -- 500,000 -- *
All executive officers and
directors as a group (9
persons)(9)................... -- 25,260,221 61.8 580,000 -- 24,680,221 60.9
All other Selling Shareholders
(3 persons)................... 577,500 1.4 170,000 -- 407,500 1.0
</TABLE>
- ------------
(1) The number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 39,955,077 shares of Class B Common
Stock and no shares of Class A Common Stock outstanding as of December 31,
1997, and (ii) 39,205,077 shares of Class B Common Stock and 4,000,000
shares of Class A Common Stock outstanding upon consummation of this
offering. Beneficial ownership is determined in accordance with the rules
and regulations of the Commission. Shares of Common Stock subject to
options that are currently exercisable or exercisable within 60 days of
December 31, 1997 are deemed to be outstanding and beneficially owned by
the person holding such options for the purpose of computing the number of
shares beneficially owned and the percentage ownership of such person, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, and subject to applicable community property laws,
such persons have sole and voting investment power with respect to all
shares of the Company's Common Stock show as beneficially owned by them.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 355,000 shares from the Company and up to an
aggregate of 170,000 shares from the Selling Shareholders.
(3) The address for Dr. Nicholas and Dr. Samueli is 16251 Laguna Canyon Road,
Irvine, California 92618. Dr. Nicholas and Dr. Samueli will each sell
85,000 additional shares if the Underwriters' over-allotment option is
exercised in full.
(4) Includes 375,000 shares of Class B Common Stock issuable pursuant to
options that are currently exercisable.
(5) Includes 450,000 shares of Class B Common Stock owned by HS Management, LP,
of which Dr. Samueli is the General Partner.
(6) Includes 45,000 shares of Class B Common Stock owned by the Estate of
Lawrence P. Wolfen, of which Mr. Wolfen serves as executor, and 300,000
shares of Class B Common Stock held on behalf of certain current and former
partners of Irell & Manella and Mr. Wolfen's two grandchildren. Mr. Wolfen
disclaims beneficial ownership of all of these shares. Excludes 225,000
shares of Class B Common Stock issued and sold to Irell & Manella pursuant
to an agreement dated as of October 31, 1997, of which Mr. Wolfen's
participation in the beneficial ownership therein is less than 5% of such
shares. See "Certain Transactions."
(7) The address for General Instrument Corporation is 2200 Byberry Road,
Hatboro, Pennsylvania 19040.
(8) The address for Cisco Systems, Inc. is 170 West Tasman Drive, San Jose,
California 95134. Consists of shares of Class A Common Stock issuable under
an option that Cisco Systems has exercised. See "Sale of Shares to Cisco
Systems."
(9) Includes an aggregate of 945,000 shares of Class B Common Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days of December 31, 1997.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock.
The following summary of the capital stock of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws does not
purport to be complete and is qualified in its entirety by the provisions of the
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 300,000,000 shares of Common Stock,
$0.0001 par value, of which 200,000,000 shares have been designated as Class A
Common Stock and 100,000,000 shares have been designated as Class B Common
Stock. At December 31, 1997, 39,955,077 shares of Class B Common Stock
(including 8,453,517 shares issuable upon conversion of all of the Preferred
Stock upon consummation of this offering) were deemed outstanding. Such shares
are held of record by approximately 173 holders. At March 18, 1998, 6,478,940
shares of Class B Common Stock were reserved for issuance upon exercise of
outstanding options. At March 18, 1998, no shares of Class A Common Stock were
outstanding.
Voting Rights. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per share.
Holders of Common Stock will vote together as a single class on all matters
submitted to a vote of shareholders, except (i) as otherwise required by law and
(ii) in the case of a proposed issuance of shares of Class B Common Stock, which
issuance shall require the affirmative vote of the holders of the majority of
the outstanding Class B Common Stock shares voting separately as a class. Under
the Company's Articles of Incorporation and Bylaws, holders of Common Stock will
not have cumulative voting rights after the Company becomes a "listed
corporation" (as defined in California Corporations Code Section 301.5) and,
therefore, holders of shares representing a majority of the voting power of
Common Stock can elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors. The Company
anticipates it will qualify as a listed corporation as of its first annual
meeting of the shareholders following this offering, provided that the Company
has at least 800 holders of its equity securities as of the record date of such
meeting.
Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of Directors
out of funds legally available for such purposes, subject to the rights of
preferred shareholders and the terms of any existing or future agreements
between the Company and its debtholders. No dividends may be declared or paid on
any share of any class of Common Stock, unless such dividend, at the same rate
per share, is simultaneously declared or paid on each share of the other class
of Common Stock. In the case of a stock dividend or distribution, holders of
Class A Common Stock are entitled to receive the same percentage dividend or
distribution as holders of Class B Common Stock and vice versa, except that
stock dividends and distributions shall be made in shares of Class A Common
Stock to the holders of Class A Common Stock and in shares of Class B Common
Stock to the holders of Class B Common Stock unless the Company's Board of
Directors determines in its discretion that it is more desirable to distribute
shares of Class A Common Stock with respect to Class B Common Stock. The Company
presently intends to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying cash dividends in
the foreseeable future. In addition, the Company's credit facility prohibits the
payment of cash dividends without the prior consent of SVB.
Convertibility. Each share of Class B Common Stock is convertible, at the
option of its holder, into one fully paid and nonassessable share of Class A
Common Stock at any time. The Class A Common Stock is not convertible into Class
B Common Stock. Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock in the event such share shall
be transferred (including, without limitation, by way of sale, assignment,
exchange, gift, bequest, appointment or otherwise) to any person or entity other
than a Permitted Transferee as such term is defined in the Articles of
Incorporation. A Permitted Transferee generally includes the following
transferees, among others: the shareholder's spouse, the lineal descendants or
spouse of such descendants, the trustee of a trust for the benefit of the holder
or a charitable organization, a charitable organization, or certain
corporations, partnerships or other entities owned by the holder.
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Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably with
the holders of Class B Common Stock in all assets available for distributions
after payment in full to creditors and holders of Preferred Stock.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
Common Stock is identical to that to be received by holders of Class B Common
Stock. No class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless the other class of Common Stock concurrently is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. All outstanding shares are, and the shares of
Class A Common Stock offered hereby will be upon issuance, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company currently has outstanding convertible Preferred Stock, which
consists of 500,000 shares of convertible Series A Preferred Stock, 600,000
shares of convertible Series B Preferred Stock, 500,000 shares of convertible
Series C Preferred Stock, 467,839 shares of convertible Series D Preferred Stock
and 1,500,000 shares of convertible Series E Preferred Stock. All of the
outstanding convertible Preferred Stock will convert into an aggregate of
8,453,517 shares of Class B Common Stock upon consummation of this offering.
Each share of convertible Series A, Series B, Series C and Series D Preferred
Stock will convert into three shares of Class B Common Stock. Each share of
convertible Series E Preferred Stock will convert into 1.5 shares of Class B
Common Stock. At the option of the holder, each share of Class B Common Stock is
convertible into one share of Class A Common Stock. See Note 5 of Notes to
Financial Statements.
Upon the consummation of this offering, the Company will have authorized
10,000,000 shares of Preferred Stock, $0.0001 par value per share, which may be
issued in series from time to time with such designations, relative rights,
priorities, preferences, qualifications, limitations and restrictions thereof,
to the extent that such qualities are not fixed in the Company's Articles of
Incorporation, as the Board of Directors determines. The rights, preferences,
limitations and restrictions of different series of Preferred Stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and other
matters. The Board of Directors may authorize the issuance of Preferred Stock
with rights senior to the Common Stock with respect to the payment of dividends
and the distribution of assets on liquidation. In addition, the Board of
Directors is authorized to fix the limitations and restrictions, if any, upon
the payment of dividends on Common Stock to be effective while any shares of
Preferred Stock are outstanding. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of a special shareholders'
meeting. Although the Company's Board of Directors has no intention at the
present time of doing so, it could issue a series of Preferred Stock, the terms
of which, subject to certain limitations imposed by the securities laws, could
impede the completion of a merger, tender offer or other takeover attempt. The
Company's Board of Directors will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
shareholders at the time of issuance. The Company's Board of Directors, in so
acting, could issue Preferred Stock having terms that could discourage an
acquisition attempt or other transaction that some, or a majority, of the
shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then market price
of such stock.
REGISTRATION RIGHTS
Upon consummation of this offering, the holders of approximately 31,392,267
shares of Common Stock (the "Registrable Securities") will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. In the event that the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other securityholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in
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<PAGE> 61
such registration, subject to certain marketing and other limitations. The
Company is generally obligated to bear the expenses, other than underwriting
discounts and sales commissions, of these registrations. The Company may in
certain circumstances defer such registrations and the underwriters have the
right, subject to certain limitations, to limit the number of Registrable
Securities included in such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is U.S. Stock
Transfer Corporation. Its telephone number is (818) 502-1404.
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<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 43,205,077 shares of Common Stock (based upon shares outstanding at
December 31, 1997), assuming no exercise of the Underwriters's over-allotment
option. Of these shares, the 3,500,000 shares registered in this offering will
be freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "Affiliates." The 39,205,077
shares of Common Stock held by existing shareholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act ("Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Section 4(1) or
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below,
and subject to the provisions of Rules 144, 144(k) and 701, the 39,205,077
shares which are deemed Restricted Shares will be available for sale in the
public market upon expiration of the lock-up agreements 180 days after the date
of this Prospectus. In addition, 500,000 shares of Common Stock sold to Cisco
Systems concurrently with this offering will be eligible for sale upon
expiration of a one-year holding period, subject to certain contractual
restrictions on transfer.
All officers, directors and option holders and substantially all
shareholders of the Company have agreed not to sell or otherwise transfer any
shares of Common Stock or any other securities of the Company for a period of
180 days after the date of this Prospectus without the prior written consent of
Morgan Stanley & Co. Incorporated.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Class A Common Stock then outstanding (which will equal approximately
40,000 shares immediately after this offering); or (ii) the average weekly
trading volume of the Class A Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an Affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144;
therefore, unless otherwise restricted, "144(k) shares" may therefore be sold
immediately upon the completion of this offering. In general, under Rule 701 of
the Securities Act as currently in effect, any employee, consultant or advisor
of the Company who purchases shares from the Company pursuant to Rule 701 in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell, unless contractually restricted, such shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained in
Rule 144.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
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Pursuant to a Registration Rights Agreement among the Company and certain
of its shareholders, holders of 31,392,267 shares of Common Stock will be
entitled to certain piggy-back registration rights with respect to such shares.
See "Description of Capital Stock -- Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by Affiliates). During the 180-day period after the date of this
Prospectus, the Company has agreed not to file any registration statement with
respect to the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable into Common Stock, other than a
Registration Statement on Form S-8 covering securities issuable under the 1994
Plan, the Special Plan and the 1998 Plan, without the prior written consent of
Morgan Stanley & Co. Incorporated.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
1994 Plan, the Special Plan and the 1998 Plan. See "Management -- Employee
Benefit Plans." Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates of the Company, be
available for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. As of
March 18, 1998, options to purchase 6,478,940 shares of Class B Common Stock
were issued and outstanding. See "Management -- Executive Compensation" and
"-- Employee Benefit Plans."
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UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters") for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown
Incorporated, Deutsche Morgan Grenfell Inc. and Hambrecht & Quist LLC are acting
as representatives (the "Representatives") have severally agreed to purchase,
and the Company and the Selling Shareholders have agreed to sell to them,
severally, the respective number of shares of Class A Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
Deutsche Morgan Grenfell Inc................................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the Underwriters' over-allotment option described below)
if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company and certain Selling
Shareholders have granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an aggregate of 525,000
shares of Class A Common Stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with this offering of the shares of
Class A Common Stock. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Class A Common Stock as the
number set forth next to such Underwriter's name in the preceding table bears to
the total number of shares of Class A Common Stock set forth next to the names
of all Underwriters in the preceding table.
The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
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The Company has agreed not to offer, pledge, sell or grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase,
lend or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, or enter into any
swap or similar agreement that transfers, in whole or in part, the economic risk
of ownership of the Common Stock, for a period of 180 days after the date of
this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to certain limited exceptions.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which officers, directors, shareholders and option holders of
the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to ten percent of the shares of Class A
Common Stock offered hereby (not including shares subject to the Underwriters'
over-allotment option) for certain parties who have expressed an interest in
purchasing such shares in this offering. The number of shares of Class A Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as other shares offered hereby.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
overallot in connection with this offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an Underwriter or a dealer for distributing the Class A Common Stock
in this offering, if the syndicate repurchases previously distributed Class A
Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
PRICING OF OFFERING
Prior to this offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation among the Company, the Selling Shareholders
and the Representatives. Among the factors to be considered in determining the
initial public offering price will be an assessment of the future prospects of
the Company and its industry in general; sales, earnings and certain other
financial and operating information of the Company in recent periods; and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Prospectus is subject to change as a
result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Brobeck Phleger & Harrison
LLP, Newport Beach, California. Certain legal matters relating to this offering
will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
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EXPERTS
The financial statements and schedules of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act (the "Registration
Statement") with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed therewith. Statements contained
in this Prospectus as to the contents of any contract of other document referred
to are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission in
Washington, D.C. and copies of all or any part thereof may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains an
Internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
that file electronically with the Commission.
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GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization...... Receiver technique for compensating for distortions
in a transmission media.
ADSL....................... Asymmetric Digital Subscriber Line. Twisted-pair
modem technology that achieves data rates up to 8
Mbps downstream to the subscriber and 1 Mbps
upstream to the network at distances up to 18,000
feet.
Bandwidth.................. A range of signal frequencies, measured in cycles
per second or Hertz (Hz). Also refers to the speed
at which data is transmitted, measured in bits per
second (bps).
Bandwidth Gap.............. The disparity between the computer processor's
speed of processing data and the communication
infrastructure's speed of transmitting data.
Broadband Communications... Data transmission at speeds of greater than 1.5
Mbps.
CMOS....................... Complementary Metal Oxide Semiconductor. Technology
used to manufacture silicon integrated circuits.
DBS........................ Direct Broadcast Satellite. A broadband
communications technology that broadcasts digital
television programming from satellites directly to
dish antennas.
DSP........................ Digital Signal Processing.
Ethernet (10Base-T)........ Networking standard for the access method widely
used in LANs for connecting devices by means of
copper twisted pair wiring at speeds of 10 Mbps.
Fast Ethernet
(100Base-T)................ An extension to the 10Base-T Ethernet network
access method which operates at 100 Mbps.
FEC........................ Forward Error Correction. A receiver technique for
correcting errors in the received data.
Gbps....................... Gigabits per second. Billion bits per second.
GHz........................ GigaHertz. Billion cycles per second.
Gigabit Ethernet........... An extension to the 100Base-T Ethernet network
access method which operates at 1,000 Mbps or 1
Gbps.
Headend.................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HFC........................ Hybrid Fiber Coax. Upgraded cable plant which uses
a combination of fiber optic cable in the backbone
and coaxial cable in the subscriber feeder plant.
IC......................... Integrated Circuit.
kbps....................... Kilobits per second. Thousand bits per second.
LAN........................ Local Area Network. A private data communications
network linking a variety of data devices such as
computers and printers within an office or home
environment.
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LMDS....................... Local Multipoint Distribution Service. A broadband
wireless communications network that uses
millimeter wave frequencies around 28 to 38 GHz to
transmit video and data to residences over a
cellular-like network at distances under a few
miles.
MAC........................ Media Access Control. Protocol for controlling the
upstream and downstream traffic flow in a local or
wide area network.
Mbps....................... Megabits per second. Million bits per second.
MCNS/DOCSIS................ Multimedia Cable Network System/Data Over Cable
Service Interface Specifications. Industry
specification that defines the technical
requirements for high-speed cable modem and headend
equipment.
MMDS....................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that uses
microwave frequencies around 2.5 GHz to transmit
video to residences at distances up to tens of
miles.
MPEG....................... Moving Picture Experts Group. Industry standard for
compressing and decompressing digital audio and
video signals.
NIC........................ Network Interface Card. Plug-in adapter card that
enables a computer to connect to a LAN.
QAM........................ Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK....................... Quadrature Phase Shift Keying. A digital modulation
technique which is widely employed in direct
broadcast satellite transmission systems.
VDSL....................... Very High-Speed Digital Subscriber Line. Twisted
pair modem technology that achieves data rates up
to 52 Mbps downstream to the subscriber and 6 Mbps
upstream to the network at distances up to 4,000
feet.
WAN........................ Wide Area Network. A data communications network,
such as the Internet, which links a variety of data
devices over a large geographical distance.
xDSL....................... Generic representation of the entire family of
Digital Subscriber Line technology spanning data
rates from 128 kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
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BROADCOM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1996 and 1997................ F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997....................................... F-4
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying balance sheets of Broadcom Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Broadcom Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Notes 7 and 9, as to which
the date is March 20, 1998
F-2
<PAGE> 71
BROADCOM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
----------------- DECEMBER 31,
1996 1997 1997
------- ------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,657 $22,116
Accounts receivable (net of allowance for doubtful
accounts and sales returns of $147 in 1996 and $721 in
1997).................................................. 3,722 9,913
Inventory................................................. 854 2,705
Deferred taxes............................................ 519 1,090
Income taxes receivable................................... -- 433
Prepaid expenses.......................................... 227 262
------- -------
Total current assets.............................. 9,979 36,519
Property and equipment, net................................. 4,298 8,449
Other assets................................................ 90 276
------- -------
Total assets...................................... $14,367 $45,244
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,140 $ 7,380
Wages and related benefits................................ 372 846
Income taxes payable...................................... 1,812 --
Accrued liabilities....................................... 57 933
Current portion of long-term debt......................... 69 1,098
------- -------
Total current liabilities......................... 4,450 10,257
Long-term debt, less current portion........................ 147 1,595
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock $0.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 2,093,839 in 1996
and 3,567,839 in 1997 (pro forma--none).............. 6,084 28,617 $ --
Class A Common Stock, $0.0001 par value:
Authorized shares--200,000,000.........................
Issued and outstanding shares--none in 1996 and 1997
(pro forma--none)....................................
Class B Common Stock, $0.0001 par value:
Authorized shares--100,000,000
Issued and outstanding shares--29,403,768 in 1996 and
31,501,560 in 1997 (pro forma--39,955,077)........... 3 3 4
Additional paid-in capital................................ 1,160 7,126 35,742
Notes receivable from employees........................... (748) (3,362) (3,362)
Deferred compensation..................................... -- (1,090) (1,090)
Retained earnings......................................... 3,271 2,098 2,098
------- ------- -------
Total shareholders' equity........................ 9,770 33,392 $33,392
------- ------- =======
Total liabilities and shareholders' equity........ $14,367 $45,244
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 72
BROADCOM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenue:
Product revenue........................................... $4,317 $18,981 $31,668
Development revenue....................................... 1,790 2,389 5,287
------ ------- -------
Total revenue..................................... 6,107 21,370 36,955
Cost of revenue............................................. 1,398 7,860 14,926
------ ------- -------
Gross profit................................................ 4,709 13,510 22,029
Operating expense:
Research and development.................................. 2,687 5,662 16,204
Selling, general and administrative....................... 2,135 3,546 8,063
------ ------- -------
Total operating expense........................... 4,822 9,208 24,267
------ ------- -------
Income (loss) from operations............................... (113) 4,302 (2,238)
Interest and other income, net.............................. 120 213 290
------ ------- -------
Income (loss) before income taxes........................... 7 4,515 (1,948)
Provision (benefit) for income taxes........................ 3 1,499 (775)
------ ------- -------
Net income (loss)........................................... $ 4 $ 3,016 $(1,173)
====== ======= =======
Basic earnings (loss) per share............................. $ 0.00 $ 0.12 $ (0.04)
====== ======= =======
Diluted earnings (loss) per share........................... $ 0.00 $ 0.09 $ (0.04)
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 73
BROADCOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN FROM DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES COMPENSATION EARNINGS
--------- ------- ---------- ------ ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ 1,100,000 $ 2,161 22,995,000 $2 $ 60 $ -- $ -- $ 251
Issuance of Preferred Stock, net
of issuance costs of $11........ 500,000 989 -- -- -- -- -- --
Exercise of stock options......... -- -- 5,100,000 1 339 (332) -- --
Net income........................ -- -- -- -- -- -- -- 4
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1995........ 1,600,000 3,150 28,095,000 3 399 (332) -- 255
Issuance of Preferred Stock, net
of issuance costs of $29........ 493,839 2,934 -- -- -- -- -- --
Exercise of stock options, net of
repurchases..................... -- -- 1,308,768 -- 761 (416) -- --
Net income........................ -- -- -- -- -- -- -- 3,016
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1996........ 2,093,839 6,084 29,403,768 3 1,160 (748) -- 3,271
Issuance of Preferred Stock, net
of issuance costs of $36........ 1,500,000 22,689 -- -- -- -- -- --
Repurchases of Preferred Stock.... (26,000) (156) -- -- -- -- -- --
Issuance of Class B Common
Stock........................... -- -- 285,000 -- 1,050 -- -- --
Exercise of stock options, net of
repurchases..................... -- -- 1,812,792 -- 3,569 (2,614) -- --
Tax benefit from exercise of stock
options......................... -- -- -- -- 191 -- -- --
Deferred compensation related to
grant of stock options.......... -- -- -- -- 1,156 -- (1,156) --
Amortization of deferred
compensation.................... -- -- -- -- -- -- 66 --
Net loss.......................... -- -- -- -- -- -- -- (1,173)
--------- ------- ---------- -- ------ ------- ------- -------
Balance at December 31, 1997........ 3,567,839 $28,617 31,501,560 $3 $7,126 $(3,362) $(1,090) $ 2,098
========= ======= ========== == ====== ======= ======= =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1994........ $ 2,474
Issuance of Preferred Stock, net
of issuance costs of $11........ 989
Exercise of stock options......... 8
Net income........................ 4
-------
Balance at December 31, 1995........ 3,475
Issuance of Preferred Stock, net
of issuance costs of $29........ 2,934
Exercise of stock options, net of
repurchases..................... 345
Net income........................ 3,016
-------
Balance at December 31, 1996........ 9,770
Issuance of Preferred Stock, net
of issuance costs of $36........ 22,689
Repurchases of Preferred Stock.... (156)
Issuance of Class B Common
Stock........................... 1,050
Exercise of stock options, net of
repurchases..................... 955
Tax benefit from exercise of stock
options......................... 191
Deferred compensation related to
grant of stock options.......... --
Amortization of deferred
compensation.................... 66
Net loss.......................... (1,173)
-------
Balance at December 31, 1997........ $33,392
=======
</TABLE>
See accompanying notes.
F-5
<PAGE> 74
BROADCOM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 4 $ 3,016 $(1,173)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 451 897 3,039
Amortization of deferred compensation.................. -- -- 66
Deferred taxes......................................... (48) (416) (571)
Change in operating assets and liabilities:
Accounts receivable.................................. 547 (2,982) (6,191)
Inventory............................................ (242) (461) (1,851)
Other assets......................................... (32) (251) (221)
Accounts payable..................................... 443 1,276 5,240
Income taxes payable................................. (23) 1,835 (2,245)
Other accrued liabilities............................ (43) 285 1,350
------- ------- -------
Net cash provided by (used in) operating activities......... 1,057 3,199 (2,557)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,112) (3,747) (7,132)
Proceeds from sales of investments available-for-sale....... 996 -- --
------- ------- -------
Net cash used in investing activities....................... (116) (3,747) (7,132)
FINANCING ACTIVITIES
Proceeds from bank term loan................................ -- -- 3,000
Payments on bank term loan.................................. -- -- (500)
Payments on capital lease obligations....................... (48) (64) (81)
Proceeds from issuance of Preferred Stock................... 989 2,934 22,689
Payments on repurchase of Preferred Stock................... -- -- (156)
Proceeds from issuance of Class B Common Stock.............. 8 345 2,196
------- ------- -------
Net cash provided by financing activities................... 949 3,215 27,148
------- ------- -------
Increase in cash and cash equivalents....................... 1,890 2,667 17,459
Cash and cash equivalents at beginning of year.............. 100 1,990 4,657
------- ------- -------
Cash and cash equivalents at end of year.................... $ 1,990 $ 4,657 $22,116
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 8 $ 26 $ 191
======= ======= =======
Income taxes paid........................................... $ 125 $ 79 $ 1,850
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 75
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the transmission of broadband
data over existing communications infrastructures, most of which were not
originally intended for digital data transmission.
In anticipation of an initial public offering of the Company's Class A
Common Stock, in February 1998, the Board of Directors approved the amendment
and restatement of the articles of incorporation to authorize 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. Upon consummation of the initial public
offering, each share of Series A, B, C and D Preferred Stock will convert into
three shares of Class B Common Stock, and each share of Series E Preferred Stock
will convert into 1.5 shares of Class B Common Stock. Effective with the
amendment of the articles of incorporation, outstanding stock options at
December 31, 1997 will be exercisable for shares of Class B Common Stock. The
shares of Class A and Class B Common Stock will be substantially identical,
except that holders of Class A Common Stock will be entitled to one vote for
each share held, and holders of Class B Common Stock will be entitled to ten
votes for each share held on all matters submitted to a vote of the
shareholders.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, inventory reserves and income tax valuation
allowances.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of three months or less to be
cash equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase of equipment through capital leases................ $ 12 $231 $ 58
Notes receivable from employees issued in connection with
exercise of stock options................................. 332 416 2,614
</TABLE>
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Provision
is made currently for estimated product returns. Development revenue is
recognized when earned.
INVESTMENTS
The Company accounts for its investments in marketable securities under
Financial Accounting Standards Board (FASB) Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. The Company's
investments have been
F-7
<PAGE> 76
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
classified as available-for-sale and are carried at fair value. The investments
are adjusted for amortization of premiums and discounts to maturity and such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Work in process........................................... $ 579 $ 2,315
Finished goods............................................ 1,024 2,076
------ -------
1,603 4,391
Less reserve for excess and obsolete inventory............ (749) (1,686)
------ -------
$ 854 $ 2,705
====== =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization
have been provided on the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment were comprised of
the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Office furniture......................................... $ 176 $ 273
Computer equipment....................................... 5,621 12,563
Leasehold improvements................................... 145 296
------- -------
5,942 13,132
Less accumulated depreciation and amortization........... (1,644) (4,683)
------- -------
$ 4,298 $ 8,449
======= =======
</TABLE>
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
Implementation of Statement No. 121 was immaterial to the financial statements
of the Company.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options.
F-8
<PAGE> 77
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings Per Share, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform with the Statement No. 128 requirements and the accounting rules set
forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998.
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Numerator: Net income (loss)........................... $ 4 $ 3,016 $ (1,173)
========== ========== ==========
Denominator:
Weighted-average shares outstanding.................. 25,618,500 28,840,023 30,212,796
Less: nonvested common shares outstanding............ (3,888,092) (3,900,591) (3,761,223)
---------- ---------- ----------
Denominator for earnings per common share.............. 21,730,408 24,939,432 26,451,573
Effect of dilutive securities:
Nonvested common shares.............................. -- 1,851,132 --
Stock options........................................ -- 194,863 --
Convertible Preferred Stock.......................... 4,550,000 6,158,057 --
---------- ---------- ----------
Denominator for diluted earnings per common share...... 26,280,408 33,143,484 26,451,573
========== ========== ==========
Basic earnings (loss) per share...................... $ 0.00 $ 0.12 $ (0.04)
========== ========== ==========
Diluted earnings (loss) per share.................... $ 0.00 $ 0.09 $ (0.04)
========== ========== ==========
</TABLE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The Company
had no reserve for estimated warranty liability at December 31, 1995 and 1996,
and had a reserve of $150,000 at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, receivables, accounts payable, and borrowings. The Company believes
all of the financial instruments' recorded values approximate current values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from
F-9
<PAGE> 78
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments by distributions to shareholders. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
2. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
A reconciliation of the provision (benefit) for income taxes at the federal
statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income taxes...... $ 2 $1,535 $(662)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit....................... 1 218 40
Benefit of research and development tax credits........... (7) (270) (229)
Other..................................................... 7 16 76
--- ------ -----
Total provision (benefit) for income taxes.................. $ 3 $1,499 $(775)
=== ====== =====
</TABLE>
The federal and state income tax provision (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 50 $1,578 $(205)
State.................................................... 1 337 1
---- ------ -----
51 1,915 (204)
Deferred:
Federal.................................................. (48) (409) (631)
State.................................................... -- (7) 60
---- ------ -----
(48) (416) (571)
---- ------ -----
$ 3 $1,499 $(775)
==== ====== =====
</TABLE>
F-10
<PAGE> 79
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... $ (33) $(54) $ --
Deferred tax assets:
Book depreciation in excess of tax depreciation........... -- -- 60
Research and experimentation tax credit carryforwards..... 164 -- 141
Net operating loss carryforwards.......................... -- -- 5
Reserves and accruals not currently deductible for tax
purposes............................................... 73 447 1,208
State tax, net of federal benefit......................... -- 117 --
Other..................................................... -- 9 9
Valuation allowance....................................... (101) -- (333)
----- ---- ------
Net deferred tax assets..................................... $ 103 $519 $1,090
===== ==== ======
</TABLE>
The reduction in the valuation allowance in 1996 was primarily due to the
utilization of research and experimentation tax credit carryforwards. The
increase in the valuation allowance in 1997 was entirely related to the state
deferred tax assets because of the uncertainty of the effect of anticipated
stock option exercises on future state taxable income. Any future benefits
recognized from any reduction of the valuation allowance will result in a
reduction of income tax expense.
At December 31, 1997, the Company had approximately $91,000 of state net
operating loss carryforwards and $141,000 of state research credit
carryforwards. These state net operating loss carryforwards and research credit
carryforwards will expire in 2002 and 2012, respectively.
3. LONG-TERM DEBT
In March 1995, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank (SVB) which, as amended in June 1997, provides for a $3.0
million term loan and a $3.0 million revolving credit facility. A $500,000
letter of credit facility is also provided in the agreement provided that
sufficient credit is available under the other two facilities. During 1997, the
full amount of the $3.0 million term loan facility was utilized at an interest
rate of SVB's prime rate as announced from time to time plus 0.5%. At December
31, 1997, $2.5 million was outstanding under the term loan facility which
matures in June 2000. The borrowing base for the revolving credit facility is
equal to 80% of the Company's eligible accounts receivable from United States
customers. Interest on this facility is equal to SVB's prime rate announced from
time to time. At December 31, 1997, no amounts were outstanding under the
revolving credit or letter of credit facilities, which expire on April 5, 1998.
The Loan and Security Agreement prohibits the payment of cash dividends,
limits the amount of additional indebtedness the Company may incur, and contains
certain minimum net worth, profitability and various other financial ratio
requirements. Substantially all of the Company's assets are collateral under the
loan and security agreement.
F-11
<PAGE> 80
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
The following is a summary of the Company's long-term debt and other loans
at December 31:
<TABLE>
<CAPTION>
1996 1997
---- -------
(IN THOUSANDS)
<S> <C> <C>
Silicon Valley Bank term loan collateralized by
substantially all of the Company's assets, payable in
varying monthly installments at a current rate of 9.3%.... $ -- $ 2,500
Capitalized lease obligations payable in varying monthly
installments at rates from 10.4% to 22.3%................. 216 193
---- -------
216 2,693
Less current portion of long-term debt...................... (69) (1,098)
---- -------
$147 $ 1,595
==== =======
</TABLE>
Principal payments on long-term debt are as follows: $1,098,000 in 1998;
$1,041,000 in 1999; $537,000 in 2000; $16,000 in 2001; and $1,000 in 2002.
Interest expense for the years ended December 31, 1995, 1996 and 1997 was
$8,000, $26,000 and $171,000, respectively.
4. COMMITMENTS
The Company has entered into operating leases for its computer equipment
and facilities with varying terms and escalation clauses. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more are as follows: $656,000 in 1998; $327,000 in 1999; $244,000 in 2000;
$140,000 in 2001; and $48,000 in 2002.
Rent expense for the years ended December 31, 1995, 1996, and 1997
aggregated $177,000, $325,000 and $739,000, respectively.
The Company had commitments totaling approximately $2.1 million as of
December 31, 1997 for the purchase of test equipment.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Preferred Stock consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
<S> <C> <C> <C>
A.............................................. 500,000 500,000 $ 1,000,000
B.............................................. 600,000 600,000 1,200,000
C.............................................. 500,000 500,000 1,000,000
D.............................................. 500,000 467,839 2,807,034
E.............................................. 1,800,000 1,500,000 22,725,000
Undesignated................................... 6,100,000 -- --
---------- --------- -----------
10,000,000 3,567,839 $28,732,034
========== ========= ===========
</TABLE>
Each share of Series A, B, C and D Preferred Stock is convertible into
three shares of Class B Common Stock. Each share of Series E Preferred Stock is
convertible into 1.5 shares of Class B Common Stock. Such shares may be
converted at any time at the option of the holder and automatically convert into
Class B
F-12
<PAGE> 81
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock in the event of an underwritten public offering of the Company's
Common Stock as long as the value of the Company for purposes of the public
offering is not less than $45,000,000.
Holders of the Company's Series A, B, C, D and E Preferred Stock are
entitled to noncumulative annual dividends of $0.20 per share in preference to
holders of Common Stock when declared by the Board of Directors. No such cash
dividends have been declared since the inception of the Company.
In the event of the liquidation of the Company, holders of Series A, B, C,
D and E Preferred Stock are entitled to receive an amount per share equal to the
original issuance price plus declared and unpaid dividends, prior and in
preference to any distribution of assets to holders of Common Stock.
The holders of Series A, B, C, D and E Preferred Stock have the right to
purchase additional shares of stock in order to maintain their ownership
percentage in the event of certain future sales of stock by the Company.
Holders of Series A, B, C, D and E Preferred Stock are entitled to the same
number of votes per share on any and all matters submitted to a shareholders
vote as the Class B Common Stock into which the Preferred Stock is convertible.
COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company issued
and sold an aggregate of 225,000 shares of Class B Common Stock to Irell &
Manella LLP for an aggregate purchase price of $1,050,000. Werner F. Wolfen, a
director of the Company, is a Senior Partner of Irell & Manella. During 1997,
the Company paid approximately $1.2 million to Irell & Manella for legal
services rendered by that firm. Irell & Manella has represented and continues to
represent the Company in various legal matters.
STOCK OPTIONS
Under the Company's Amended and Restated 1994 Stock Option Plan (the 1994
Plan), the Board of Directors or a Committee consisting of two or more members
of its Board of Directors is authorized to grant options to purchase the
Company's Class B Common Stock to its employees, members of the Board of
Directors, and certain consultants. Incentive options may be granted at an
exercise price equal to or greater than 100% of the fair market value at the
date of grant, and non-qualified options may be granted at an exercise price
equal to or greater than 85% of the fair market value on the date of grant.
The options are exercisable immediately upon issuance and generally have a
term of ten years. The Company reserves the right to purchase all unvested
shares held by the participant upon the participant's termination at the
original purchase price. Fully vested shares not purchased by the participant
within three months after termination are cancelled and returned to the plan.
The vesting schedule is determined by the Board or the Committee at the time of
issuance. Stock options generally vest at the rate of 25% after one year and
ratably on a monthly basis for three years thereafter. Until the Company's
Common Stock is registered with the Securities and Exchange Commission, the
Company has the right of first refusal to purchase any shares of Common Stock
issued under the 1994 Plan.
At the discretion of the Board or the Committee, the Company may make
secured loans to option holders in amounts up to the exercise price of their
options plus related taxes or permit the option holder to pay the exercise price
in installments over a determined period. During 1995, 1996 and 1997, the
Company loaned $332,000, $416,000 and $2,614,000 to employees for the exercise
of options, respectively. These notes are full-recourse, are secured by the
shares of stock, are interest bearing with rates ranging from 6.0% to 6.5%, are
due between three and five years from the exercise date and must be repaid upon
sale of the underlying shares of stock.
F-13
<PAGE> 82
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
During 1995, 1996 and 1997, the Company's Board of Directors approved an
increase in the number of common shares reserved and available for issuance
under the 1994 Plan by 1,650,000 shares, 4,500,000 shares and 9,600,000 shares,
respectively (or from 3,750,000 shares in 1995 to 19,500,000 shares in 1997).
Activity under the 1994 Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 492,000 3,258,000 $ 0.07 $0.07
Additional shares reserved.......... 1,650,000 -- -- --
Options granted..................... (1,942,500) 1,942,500 0.07 0.07
Options canceled.................... 3,000 (3,000) 0.07 0.07
Options exercised................... -- (5,100,000) 0.07 0.07
---------- ---------- -------------- -----
Balance at December 31, 1995.......... 202,500 97,500 0.07 0.07
Additional shares reserved.......... 4,500,000 -- -- --
Options granted..................... (3,269,250) 3,269,250 0.07 - 1.13 0.73
Options exercised................... -- (1,314,300) 0.07 - 1.13 0.51
---------- ---------- -------------- -----
Balance at December 31, 1996.......... 1,433,250 2,052,450 0.07 - 1.13 0.85
Additional shares reserved.......... 9,600,000 -- -- --
Options granted..................... (5,330,400) 5,330,400 1.13 - 8.00 2.52
Options canceled.................... 11,061 (11,061) 0.50 - 1.13 0.79
Options exercised................... -- (1,970,357) 0.50 - 8.00 1.87
---------- ---------- -------------- -----
Balance at December 31, 1997.......... 5,713,911 5,401,432 $ .07 - $8.00 $2.12
========== ========== ============== =====
</TABLE>
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.07 to $1.00.............. 698,325 8.37 $0.62 698,325 $0.62
$1.13 to $1.25.............. 3,089,707 9.28 $1.16 3,089,707 $1.16
$3.00 to $5.00.............. 1,376,400 9.83 $4.04 1,376,400 $4.04
$8.00....................... 237,000 9.99 $8.00 237,000 $8.00
</TABLE>
Additional information relating to the 1994 Plan is as follows at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase.... 3,888,092 3,900,590 3,572,742
Weighted average repurchase price................ $0.07 $0.21 $1.05
Unvested options outstanding..................... 90,000 1,997,273 5,385,588
Total reserved Class B Common Stock shares for
stock option plans............................. 300,000 3,485,700 11,115,343
</TABLE>
The Company recorded deferred compensation of $1,156,000 during the year
ended December 31, 1997 for the difference between the exercise price and the
deemed value of certain of the Company's stock options
F-14
<PAGE> 83
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
granted under the 1994 Plan. These amounts are being amortized by charges to
operations over the vesting periods of the individual stock options, which are
generally four years. In the year ended December 31, 1997, $66,000 was amortized
to expense.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income (loss)
per share is required by Statement No. 123 for stock-based awards to employees
as if the Company had accounted for such awards using a valuation method
permitted under Statement No. 123.
Stock-based awards to employees under the Plan during the years ended
December 31, 1995, 1996 and 1997 were valued using the minimum value method,
assuming no expected dividends, a weighted-average expected life of 3.5 years
and a weighted-average risk-free interest rate of 6.0%. Should the Company
complete an initial public offering of its common stock, stock-based awards
granted thereafter will be valued using the Black-Scholes option pricing model.
Among other things, the Black-Scholes model considers the expected volatility of
the Company's stock price, determined in accordance with Statement No. 123, in
arriving at an estimated fair value. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes model may differ significantly from assumptions used to
calculate the value of stock-based awards under the minimum value method.
The weighted-average minimum values of options granted to employees during
1995, 1996 and 1997 were $0.01, $0.12 and $0.75, respectively. For pro forma
purposes, the estimated minimum value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying instruments.
The results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Pro forma:
Net income (loss).................................... $ -- $2,947 $(1,755)
Basic earnings (loss) per share...................... $0.00 $ 0.12 $ (0.07)
Diluted earnings (loss) per share.................... $0.00 $ 0.08 $ (0.07)
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment
Plan which was established in 1996, covering substantially all of the Company's
employees, subject to certain eligibility requirements. At its discretion, the
Company may make contributions to the plan. No contributions were made by the
Company in 1996 or 1997.
7. LITIGATION
In December 1996, Stanford Telecommunications, Inc. ("STI") filed an action
against the Company in the United States District Court for the Northern
District of California alleging that the Company's BCM-3036 upstream QPSK/QAM
burst transmitter used in cable modems infringed one of STI's patents (the
" '352 Patent"). The complaint seeks an injunction against the Company, as well
as the recovery of monetary damages, including treble damages for willful
infringement. The Company has filed an answer and affirmative defenses to STI's
complaint, denying the allegations in STI's complaint, and has asserted a
counterclaim requesting declaratory relief that the Company is not infringing
the '352 Patent and that the '352 Patent is invalid and unenforceable. The
Company believes that it has strong defenses to STI's claims on both invalidity
F-15
<PAGE> 84
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LITIGATION (CONTINUED)
and noninfringement grounds. Although the Company believes that it has strong
defenses, a finding of infringement by the Company in this action could lead to
liability for monetary damages (which could be trebled in the event that the
infringement were found to have been willful), the issuance of an injunction
requiring that the Company withdraw various modem products from the market,
substantial product redesign expenses (assuming that a non-infringing design is
feasible and economic) and associated time-to-market delays, and indemnification
claims by the Company's customers or strategic partners, each of which events
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. These
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging it "illegally pirated" Sarnoff's employees. The complaint seeks
to preliminarily and permanently enjoin the Company and the Former Employees
from utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their statutory and contractual duties of
confidentiality to Sarnoff by precluding them from working for six months in any
capacity relating to certain of the Company's programs. The Company has filed an
answer and is vigorously defending itself in this action. In May 1997, the Court
denied Sarnoff's request for a temporary restraining order. The Company
commenced its own lawsuit against Sarnoff in the Orange County Superior Court of
California alleging breach of contract, fraud, misappropriation of trade
secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. This action was removed
to the United States District Court, Central District of California and was
stayed pending resolution of the New Jersey action.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The Company and RSSI have executed a
settlement agreement in this action, pursuant to which the Company has agreed
not to hire or extend an offer to any employees from RSSI for 30 days following
the consummation of this offering. While the settlement agreement requires RSSI
to dismiss this action without prejudice, it does not release any claims that
RSSI may assert in the future regarding the actual use or misappropriation by
the Company of trade secrets or other proprietary information of RSSI.
In March 1998, Scott Davis, the Company's former Chief Financial Officer,
filed a complaint in California Superior Court against the Company and its Chief
Executive Officer, Henry T. Nicholas, III, alleging claims for fraud and deceit,
negligent misrepresentation, breach of contract, breach of fiduciary duty,
constructive fraud, conversion and breach of the implied covenant of good faith
and fair dealing. These claims relate to Mr. Davis' alleged ownership of 26,000
shares of Series D Preferred Stock originally purchased by Mr. Davis in February
1996 (which shares would be convertible into 78,000 shares of Class B Common
Stock). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and
F-16
<PAGE> 85
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LITIGATION (CONTINUED)
declaratory relief. The Company is preparing an answer to Mr. Davis' complaint,
which will be filed in the near future. If Mr. Davis is successful in his claim,
he may be entitled to certain rights as a holder of Series D Preferred Stock.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The cases involving intellectual property rights involve complex questions
of fact and law and could require the expenditure of significant costs and
diversion of resources to defend. Although management believes the outcome of
the Company's outstanding legal proceedings, claims and litigation will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity, the results of litigation are inherently uncertain, and
such outcome is at least reasonably possible. The Company is unable to make an
estimate of the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying financial
statements.
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment, broadband communications.
During 1995, 1996 and 1997, the Company had a total of five customers whose
revenue represented a significant portion of total revenue in certain or all
years. Revenue from two of these customers was approximately 13.9% and 10.9% of
total revenue in 1995. Revenue from another customer represented approximately
13.8% in 1995, 28.0% in 1996, and 31.9% in 1997 of total revenue for the
respective year. Revenue from a fourth customer accounted for approximately
16.1% of total revenue in 1996. Revenue from a fifth customer was approximately
15.2% in 1996 and 14.6% in 1997 of total revenue for the respective year.
No other customer represented more than 10% of the Company's annual
revenue.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and amounts provided for doubtful
accounts.
Export revenue to all foreign customers as a percent of total revenue was
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Europe............................................... 10.5% 6.1% 5.2%
Asia................................................. 10.1 2.9 6.7
Other................................................ 1.9 3.5 3.5
---- ---- ----
22.5% 12.5% 15.4%
==== ==== ====
</TABLE>
The Company does not own or operate a fabrication facility, and
substantially all of its semiconductor device requirements are currently
supplied by two outside foundries in Asia. Any sudden demand for an increased
amount of semiconductor devices or sudden reduction or elimination of any
existing source or sources of semiconductor devices could result in a material
delay in the shipment of the Company's products. In addition, substantially all
of the Company's products are assembled and tested by one of two third-party
subcontractors in Asia. The Company does not have long-term agreements with any
of these suppliers. Any problems associated with the fabrication facilities, and
the delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
F-17
<PAGE> 86
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
STOCK SPLIT
On February 3, 1998, the Board of Directors approved a 3-for-2 split,
effective March 9, 1998, of the Company's Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect the stock split in the Company's capital structure.
SALE OF SHARES TO CISCO SYSTEMS
On February 3, 1998, Cisco Systems, Inc. (Cisco) exercised its option to
purchase 500,000 shares of Class A Common Stock upon consummation of the
Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco in connection with the Development and License
Agreement entered into between the Company and Cisco and effective in September
1996, as amended on February 3, 1998.
1998 STOCK INCENTIVE PLAN
The 1998 Stock Incentive Plan (the 1998 Plan) was adopted on February 3,
1998 to serve as the successor equity incentive program to the Company's 1994
Plan. A total of 16,115,343 shares of Common Stock have been authorized for
issuance under the 1998 Plan. On the 1998 Plan effective date, outstanding
options under the 1994 Plan and the 1998 Special Stock Option Plan (the Special
Plan), a plan adopted to permit options to be granted with terms permitted by
the 1998 Plan prior to the 1998 Plan becoming effective, will be incorporated
into the 1998 Plan, and no further option grants will be made under the 1994
Plan or the Special Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the Purchase Plan) was adopted on
February 3, 1998, which allows employees to designate up to 15 percent of their
total compensation to purchase shares of the Company's Class A Common Stock at
85% of fair market value. 750,000 shares of Class A Common Stock have been
reserved for issuance under the Purchase Plan.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA
Irell & Manella has represented and continues to represent the Company in
various legal matters pursuant to an engagement agreement dated as of January 1,
1997, and amended as of January 1, 1998. Under the engagement agreement, the
Company has agreed to pay Irell & Manella a fixed fee plus costs for the firm's
legal services rendered from and after January 1, 1998 with respect to certain
litigation matters. Irell & Manella has agreed to render legal services to the
Company on most other matters at reduced rates from the firm's standard for the
two-year period commencing January 1, 1998.
F-18
<PAGE> 87
[BROADCOM LOGO]
<PAGE> 88
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR CISCO PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued March 23, 1998
500,000 Shares
[BROADCOM LOGO]
CLASS A COMMON STOCK.
------------------------
THIS PROSPECTUS RELATES TO THE 500,000 SHARES OF CLASS A COMMON STOCK TO BE SOLD
BY THE COMPANY TO CISCO SYSTEMS, INC. THE COMPANY HAS TWO CLASSES OF COMMON
STOCK: CLASS A COMMON STOCK AND CLASS B COMMON STOCK (COLLECTIVELY, THE "COMMON
STOCK"). THE SHARES OF COMMON STOCK ARE SUBSTANTIALLY IDENTICAL EXCEPT THAT THE
HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE, AND THE
HOLDERS OF CLASS B COMMON STOCK ARE ENTITLED TO TEN VOTES PER SHARE, ON ALL
MATTERS SUBMITTED TO A VOTE OF THE SHAREHOLDERS. EACH SHARE OF CLASS B COMMON
STOCK IS CONVERTIBLE AT THE OPTION OF THE HOLDER INTO ONE SHARE OF CLASS A
COMMON STOCK, AND GENERALLY WILL AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A
COMMON STOCK UPON TRANSFER OF THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER.
SEE "DESCRIPTION OF CAPITAL STOCK." PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. THE OFFERING PRICE TO CISCO
SYSTEMS, INC. WILL BE EQUAL TO THE INITIAL PUBLIC OFFERING PRICE OF THE
COMPANY'S CLASS A COMMON STOCK, NET OF UNDERWRITING DISCOUNTS AND COMMISSIONS.
IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$10 AND $12 PER SHARE. THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY HAVE
BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"BRCM."
------------------------
ALL REFERENCES HEREIN TO "THIS OFFERING," "OFFERED HEREBY," "THE OFFERING MADE
HEREBY" AND "SELLING SHAREHOLDERS" REFER TO THE COMPANY'S INITIAL PUBLIC
OFFERING OF CLASS A COMMON STOCK.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 89
[ALTERNATE PAGE FOR CISCO PROSPECTUS]
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............. 3
Risk Factors................... 5
Sale of Shares to Cisco
Systems...................... 16
Use of Proceeds................ 16
Dividend Policy................ 16
Capitalization................. 17
Dilution....................... 18
Selected Financial Data........ 19
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 20
Business....................... 26
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management..................... 44
Certain Transactions........... 54
Principal and Selling
Shareholders................. 56
Description of Capital Stock... 57
Shares Eligible for Future
Sale......................... 60
Plan of Distribution........... 62
Legal Matters.................. 63
Experts........................ 64
Additional Information......... 64
Glossary of Technical Terms.... 65
Index to Financial
Statements................... F-1
</TABLE>
------------------------
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first three
quarters of each year.
------------------------
Broadcom and QAMLink are registered trademarks of the Company. This
Prospectus also includes trademarks of companies other than the Company.
------------------------
Except as otherwise noted herein, information in this Prospectus assumes
(i) the conversion of all outstanding shares of convertible Preferred Stock into
an aggregate of 8,453,517 shares of Class B Common Stock upon consummation of
this offering, (ii) the recapitalization of the Company on March 9, 1998 to
effect the conversion into Class B Common Stock of all shares of the Company's
common stock issued and outstanding or reserved for issuance on March 9, 1998,
(iii) no exercise of outstanding options to purchase shares of Class B Common
Stock, of which options to purchase 6,478,940 shares were outstanding at March
18, 1998, (iv) the three-for-two stock split of the Company's Class B Common
Stock effected on March 9, 1998 and (v) no exercise of the Underwriters'
over-allotment option.
4
<PAGE> 90
[ALTERNATE PAGE FOR CISCO PROSPECTUS]
PLAN OF DISTRIBUTION
The shares being registered hereunder are being issued and sold by the
Company to Cisco Systems pursuant to a stock purchase agreement entered into
upon exercise of an option granted to Cisco Systems in conjunction with a
development agreement. This offering is not being underwritten. See "Sale of
Shares to Cisco Systems" and "Certain Transactions."
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Brobeck Phleger & Harrison LLP, Newport Beach,
California.
62
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by the Company.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Registration fee............................................ $ 15,895
NASD filing fee............................................. 5,888
Nasdaq National Market listing fee.......................... 27,625
Blue sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 120,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 160,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous............................................... 50,592
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (1) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interest of the Company or its shareholders or that involve
the absence of good faith on the part of the director, (iii) for any transaction
from which a director derived an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of a serious injury to the Company or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (vi) under
Section 310 of the California Law concerning contacts or transactions between
the Company and a director, or (vii) under Section 316 of the California Law
concerning directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to the Company's shareholders for any
violation by a director of the director's fiduciary duty to the Company or its
shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to
II-1
<PAGE> 92
indemnify these directors or executive officers (other than for liability
resulting from willful misconduct of a culpable nature), to advance expenses to
them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled to
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms. Section 317 of the California Law and the Company's Bylaws
make provision for the indemnification of officers, directors and other
corporate agents in terms sufficiently broad to indemnify such persons, under
certain circumstances, for liabilities (including reimbursement of expense
incurred) arising under the Securities Act.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Company and its
officers and directors, and by the Company of the Underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder, and will automatically
convert upon transfer, except to certain Permitted Transferees as defined in the
Articles of Incorporation. The following is a summary of transactions by the
Registrant since January 1, 1995 involving sales of the Registrant's securities
that were not registered under the Securities Act:
1. In March 1995, the Registrant issued and sold 500,000 shares of Series C
Preferred Stock to Scientific-Atlanta, Inc. at a price per share of $2.00. Each
share of Series C Preferred Stock will convert into three shares of Class B
Common Stock upon consummation of this offering.
2. In February 1996, the Registrant issued and sold an aggregate of 493,839
shares of Series D Preferred Stock to 22 accredited individual investors and
strategic partners at a price per share of $6.00, or an aggregate purchase price
of $2,963,000. Each share of Series D Preferred Stock will convert into three
shares of Class B Common Stock upon consummation of this offering.
3. In June 1997, the Registrant issued and sold 60,000 shares of Class B
Common Stock to the Regents of the University of New Mexico ("UNM") in
connection with a License Agreement between UNM and the Registrant. The shares
were issued as part of the Registrant's consideration to UNM in return for a
license grant and certain research and development services rendered to the
Registrant. The consideration tendered to the Registrant was valued at an
aggregate of $67,800 or $1.13 per share.
4. In September 1997, the Registrant issued and sold 1,500,000 shares of
Series E Preferred Stock to General Instrument Corporation at a price per share
of $15.15, or an aggregate purchase price of $22,750,000. This transaction was
undertaken in connection with a Development, Supply and License Agreement
between General Instrument and the Registrant. Each share of Series E Preferred
Stock will convert into 1.5 shares of Class B Common Stock upon consummation of
this offering.
5. In October 1997, the Registrant issued and sold 225,000 shares of Class
B Common Stock to Irell & Manella LLP at a price per share of $4.67, or an
aggregate purchase price of $1,050,000.
6. Since January 1, 1995, the Registrant has issued non-qualified stock
options under its 1994 Plan and Special Plan to certain eligible officers,
directors, consultants and employees to the purchase an aggregate of 11,737,925
shares of Class B Common Stock. Such optionees included consultants who rendered
bonafide consulting services to the Registrant, which services included
engineering support, marketing services and strategic planning and guidance.
None of the optionees paid any cash consideration for such options. Such
II-2
<PAGE> 93
options did not involve a "sale" of securities; and, accordingly, registration
was not required. The following table sets forth the grant date, number of
options, current exercise price and class of optionees for all of such options:
<TABLE>
<CAPTION>
NO. OF EXERCISE CLASS OF
GRANT DATE OPTIONS PRICE OPTIONEES
- --------------------- --------- -------- -------------------------
<S> <C> <C> <C>
03/01/95 to 01/31/96 2,212,500 $ 0.07 Employees and Consultants
03/01/96 to 07/08/96 1,507,500 $ 0.50 Employees and Consultants
07/11/96 to 07/31/96 418,500 $ 1.00 Employees and Consultant
08/06/96 to 08/29/97 3,770,250 $ 1.13 Employees and Consultants
06/23/97 750,000 $ 1.25 Two Officers
09/15/97 to 09/30/97 421,500 $ 3.00 Employees
10/09/97 to 10/31/97 514,200 $ 4.00 Employees
11/03/97 to 11/28/97 485,700 $ 5.00 Employees and a Director
12/01/97 to 12/31/97 462,000 $ 8.00 Employees
01/01/98 to 03/18/98 1,195,775 $10.00 Employees and Officers
</TABLE>
The sale and issuance of securities set forth above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof or Rule 701 adopted thereunder. The recipients of the securities in each
of the transactions set forth in above represented their intention to acquire
such securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments used in such transactions. All
recipients received adequate information about the Registrant at the time of the
acquisition of such securities or had access, through employment or other
relationships with the Registrant, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
4.1 Specimen certificate representing shares of Class A Common
Stock of the Registrant.
5.1 Form of Opinion of Brobeck Phleger & Harrison LLP.
10.1** Form of Indemnification Agreement for Directors of the
Registrant.
10.2** Form of Indemnification Agreement for Officers of the
Registrant.
10.3** 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.
10.5** 1998 Employee Stock Purchase Plan.
10.6** Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7** Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
</TABLE>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.8+** Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9** Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10** Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11** Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
10.12 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13 Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+ Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP.
11.1** Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Financial Statements).
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1** Power of Attorney (contained on signature page on page
II-5).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
+ Registrant has sought confidential treatment pursuant to Rule 406 of portions
of the referenced exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule
(2) Schedule II--Valuation and qualifying accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE> 95
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 23rd day of March, 1998.
BROADCOM CORPORATION
By: /s/ HENRY T. NICHOLAS, III
------------------------------------
Henry T. Nicholas, III
Co-Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ HENRY T. NICHOLAS, III Co-Chairman, President and March 23, 1998
- ----------------------------------------------------- Chief Executive Officer
Henry T. Nicholas, III (principal executive officer)
/s/ HENRY SAMUELI Co-Chairman, Vice President March 23, 1998
- ----------------------------------------------------- of Engineering and
Henry Samueli Chief Technical Officer
/s/ WILLIAM J. RUEHLE Vice President, Chief March 23, 1998
- ----------------------------------------------------- Financial Officer and
William J. Ruehle Secretary
(principal financial and
accounting officer)
* Director March 23, 1998
- -----------------------------------------------------
Alan E. Ross
* Director March 23, 1998
- -----------------------------------------------------
Werner F. Wolfen
* Director March 23, 1998
- -----------------------------------------------------
Myron S. Eichen
</TABLE>
*By: /s/ HENRY T. NICHOLAS, III
-------------------------------
Henry T. Nicholas, III
Attorney-in-Fact
II-6
<PAGE> 97
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Broadcom Corporation
We have audited the financial statements of Broadcom Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated January 16, 1998,
except for Notes 7 and 9, as to which the date is March 20, 1998 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Notes 7 and 9, as to which
the date is March 20, 1998
S-1
<PAGE> 98
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $ 50,000 $ 162,000 $ -- $ 50,000 $ 162,000
Reserve for excess and obsolete
inventory........................ -- 55,000 -- -- 55,000
-------- ---------- ---- -------- ----------
Total......................... $ 50,000 $ 217,000 $ -- $ 50,000 $ 217,000
======== ========== ==== ======== ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $162,000 $ 213,000 $ -- $228,000 $ 147,000
Reserve for excess and obsolete
inventory........................ 55,000 1,055,000 -- 361,000 749,000
-------- ---------- ---- -------- ----------
Total......................... $217,000 $1,268,000 $ -- $589,000 $ 896,000
======== ========== ==== ======== ==========
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $147,000 $ 574,000 $ -- $ -- $ 721,000
Reserve for excess and obsolete
inventory........................ 749,000 1,028,000 -- 91,000 1,686,000
-------- ---------- ---- -------- ----------
Total......................... $896,000 $1,602,000 $ -- $ 91,000 $2,407,000
======== ========== ==== ======== ==========
</TABLE>
S-2
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
------- ----------- -------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement..............................
3.1 Amended and Restated Articles of Incorporation of the
Registrant..................................................
3.2 Bylaws of the Registrant....................................
4.1 Specimen certificate representing shares of Class A Common
Stock of the Registrant.....................................
5.1 Form of Opinion of Brobeck Phleger & Harrison LLP...........
10.1** Form of Indemnification Agreement for Directors of the
Registrant..................................................
10.2** Form of Indemnification Agreement for Officers of the
Registrant..................................................
10.3** 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement...................................................
10.4* 1998 Stock Incentive Plan, together with form of Stock
Option Agreement and form of Stock Issuance Agreement.......
10.5** 1998 Employee Stock Purchase Plan...........................
10.6** Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended..............
10.7** Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended..............
10.8+** Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc. .....
10.9** Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc. .........................
10.10** Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as
amended.....................................................
10.11** Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners...................
10.12 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.......
10.13 Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP..........................
10.14+ Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP..............
11.1** Statement Regarding Computation of Earnings Per Share
(contained in Note 1 of Notes to Financial Statements)......
23.1 Consent of Independent Auditors.............................
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1)................................................
24.1** Power of Attorney (contained on signature page on page
II-5).......................................................
27.1** Financial Data Schedule.....................................
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
+ Registrant has sought confidential treatment pursuant to Rule 406 of portions
of the referenced exhibit.
<PAGE> 1
EXHIBIT 1.1
DRAFT DATED
02/12/98
_______________ SHARES
BROADCOM CORPORATION
CLASS A COMMON STOCK, PAR VALUE $.0001 PER SHARE
UNDERWRITING AGREEMENT
__________, 1998
<PAGE> 2
_____________, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Hambrecht & Quist LLC
Deutsche Morgan Grenfell Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Broadcom Corporation, a California corporation (the "COMPANY")
co-founded by Henry T. Nicholas and Henry Samueli (individually a "FOUNDER" and
collectively the "FOUNDERS"), proposes to issue and sell to the several
Underwriters named in Schedule II hereto (the "UNDERWRITERS"), and certain
shareholders of the Company (the "SELLING SHAREHOLDERS") named in Schedule I
hereto severally propose to sell to the several Underwriters, an aggregate of
_______________ shares (the "FIRM SHARES") of the Class A Common Stock, no par
value, of the Company (the "CLASS A COMMON STOCK"), of which _____________
shares are to be issued and sold by the Company and _____________ shares are to
be sold by the Selling Shareholders, each Selling Shareholder selling the amount
set forth opposite such Selling Shareholder's name in Schedule I hereto.
The Company also proposes to issue and sell and certain Selling
Shareholders propose to sell to the several Underwriters not more than an
additional ______________ shares of its Class A Common Stock (the "ADDITIONAL
SHARES") if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 3 hereof. The
Firm Shares and the Additional Shares are hereinafter collectively referred to
as the "SHARES." The shares of Class A Common Stock and Class B Common Stock, no
par value (the "CLASS B COMMON STOCK"), of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK." The Company and the Selling Shareholders are hereinafter
sometimes collectively referred to as the "SELLERS."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Class A Common
-2-
<PAGE> 3
Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the "REGISTRATION
STATEMENT" shall be deemed to include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the Shares
set forth opposite its name on Schedule II to this Agreement, up to
________________ shares, for sale to the Company's employees, officers, and
directors [and other parties associated with the Company] (collectively,
"PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriting"
(the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant
to the Directed Share Program (the "DIRECTED SHARES") will be sold by Morgan
Stanley pursuant to this Agreement at the public offering price. Any Directed
Shares not orally confirmed for purchase by any Participants by the end of the
business day on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FOUNDERS. The
Company and the Founders jointly and severally represent and warrant to and
agree with each of the Underwriters that:
(a) The Registration Statement has become effective under the
Securities Act; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that the representations and warranties set
forth in this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the state
of California, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the
-3-
<PAGE> 4
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(e) All of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by the
Company, free and clear of any security interest, lien, encumbrance,
equity, claim or adverse interest of any nature.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(h) The shares of Common Stock (including the Shares to be
sold by the Selling Shareholders) outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable; except as set forth in
the Prospectus, neither the Company nor any subsidiary has outstanding
any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible securities or
obligations; and all outstanding shares of capital stock and options
and other rights to acquire capital stock have been issued in
compliance with the registration and qualification provisions of all
applicable securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar rights.
(i) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive rights, rights of first refusal or similar rights.
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company or any subsidiary or any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its subsidiaries,
taken as a whole, or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of
the various states and jurisdictions in connection with the offer and
sale of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
-4-
<PAGE> 5
(l) There are no legal, regulatory or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of
its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(m) Each of the Company and its subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits
of and from, and has made all declarations and filings with, all
foreign, federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to
own, lease, license and use its properties and assets and to conduct
its business in the manner described in the Prospectus, except to the
extent that the failure to obtain or file would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(n) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(o) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(p) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (collectively, "ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(q) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(r) There is no legal or beneficial owner of any securities of
the Company who has any rights, not effectively satisfied or waived, to
require registration of any shares of capital stock of the Company in
connection with the filing of the Registration Statement.
-5-
<PAGE> 6
(s) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(t) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (i) the
Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (ii) the Company
has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock other than ordinary and customary dividends; and (iii)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its subsidiaries, except in
each case as described in the Prospectus.
(u) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them that is material to the business
of the Company and its subsidiaries, in each case free and clear of any
security interest, lien, encumbrance, claim, defect or adverse interest
of any nature except such as are described in the Prospectus or such as
do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings
held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
(v) The Company and each of its subsidiaries own or possesses
adequate licenses or other rights to use all patents, patent rights
inventions, trade secrets, copyrights, trademarks, service marks, trade
names, technology and know-how currently employed or proposed to be
employed by them in connection with their business as described in the
Prospectus, the Company is not obligated to pay a royalty, grant a
license, or provide other consideration to any third party in
connection with its patents, copyrights, trademarks, service marks,
trade names, or technology other than as disclosed in the Prospectus,
and, except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries has received any notice of infringement or conflict
with (and neither the Company nor any of its subsidiaries knows of any
infringement or conflict with) asserted rights of others with respect
to any patents, patent rights, inventions, trade secrets, copyrights,
trademarks, service marks, trade names, technology or know-how which
could result in any material adverse effect upon the Company and its
subsidiaries, taken as a whole; and, except as disclosed in the
Prospectus, the discoveries, inventions, products or processes of the
Company and its subsidiaries referred to in the Prospectus do not, to
the best knowledge of the Company or any of its subsidiaries, infringe
or conflict with any right or patent of any third party, or any
discovery, invention, product or process which is the subject of a
patent application filed by any third party, known to the Company or
any of its subsidiaries which could have a material adverse effect on
the Company and its subsidiaries, taken as a whole. No third party,
including any academic or governmental organization, possesses rights
to the Company's patents, copyrights, trademarks, service marks, trade
names, or technology which, if exercised, could enable such third party
to develop products competitive to those of the Company or could have a
material adverse effect on the ability of the Company to conduct its
business in the manner described in the Prospectus.
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<PAGE> 7
(w) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(x) The Company and its subsidiaries are insured by the
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any of
its subsidiaries has been refused any insurance coverage sought or
applied for; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole, except as described
in the Prospectus.
(y) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
business, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described the
Prospectus
(z) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only
in accordance with management's general or specific authorization; and
(4) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(aa) Ernst & Young LLP are, and during the periods covered by
their report included in the Registration Statement were, independent
certified public accountants with respect to the Company and its
subsidiaries within the meaning of the Securities Act.
(bb) The Nasdaq Stock Market, Inc. has approved the Class A
Common Stock for listing on the Nasdaq National Market, subject only to
official notice of issuance.
(cc) Except for the Shares, all outstanding shares of Common
Stock, and all securities convertible into or exercisable or
exchangeable for Common Stock, are subject to valid and binding
agreements (collectively, the "LOCK-UP AGREEMENTS") that restrict the
holders thereof from selling, making any short sale of, granting any
option for the purchase of, or otherwise transferring or disposing of,
any of such shares of Common Stock, or any such securities convertible
into or exercisable or exchangeable for Common Stock, for a period of
180 days after the date of the Prospectus without the prior written
consent of the Company or Morgan Stanley & Co. Incorporated.
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<PAGE> 8
(dd) The Company (i) has notified each holder of a currently
outstanding option issued under the 1994 Stock Option Plan (the "OPTION
PLAN") and each person who has acquired shares of Common Stock pursuant
to the exercise of any option granted under the Option Plan that
pursuant to the terms of the Option Plan, none of such options or
shares may be sold or otherwise transferred or disposed of for a period
of 180 days after the date of the initial public offering of the Shares
and (ii) has imposed a stop-transfer instruction with the Company's
transfer agent in order to enforce the foregoing lock-up provision
imposed pursuant to the Option Plan.
(ee) The Company (i) has notified each shareholder who is
party to the Registration Rights Agreement dated February 26, 1996, as
amended (the "REGISTRATION RIGHTS AGREEMENT"), that pursuant to the
terms of the Registration Rights Agreement, none of the shares of the
Company's capital stock held by such shareholder may be sold or
otherwise transferred or disposed of for a period of 180 days after the
date of the initial public offering of the Shares and (ii) has imposed
a stop-transfer instruction with the Company's transfer agent in order
to enforce the foregoing lock-up provision imposed pursuant to the
Registration Rights Agreement.
Furthermore, the Company represents and warrants to Morgan
Stanley that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or
supplements thereto will comply, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that
(ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the
United States.
The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its
products.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of
the Selling Shareholders, including the Founders, represents and warrants to and
agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Shareholder and ____________, as Custodian, relating to the deposit of
the Shares to be sold by such Selling Shareholder (the "CUSTODY
AGREEMENT") and the Power of Attorney appointing certain individuals as
such Selling Shareholder's attorneys-in-fact to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement (the "POWER OF ATTORNEY") will not contravene
any provision of applicable law, or the certificate of incorporation or
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<PAGE> 9
by-laws of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon such
Selling Shareholder or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required
for the performance by such Selling Shareholder of its obligations
under this Agreement or the Custody Agreement or Power of Attorney of
such Selling Shareholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Shareholder
and the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement
and the Power of Attorney and to sell, transfer and deliver the Shares
to be sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant
to this Agreement have been duly authorized and are validly issued,
fully paid and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Shareholder and
are valid and binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling
Shareholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances.
(g) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 2(g) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
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<PAGE> 10
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell and certain Selling Shareholders named in Schedule III hereto severally
agree to sell to the Underwriters the Additional Shares, of which ___________
shares are to be issued and sold by the Company and _________ shares are to be
sold by such Selling Shareholders, each such Selling Shareholder selling the
amount set forth opposite such Selling Shareholder's name in Schedule III
hereto, and the Underwriters shall have a one-time right to purchase, severally
and not jointly, up to _______________ Additional Shares at the Purchase Price.
If you, on behalf of the Underwriters, elect to exercise such option, you shall
so notify the Company in writing not later than 30 days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section 5
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule II hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the sale of any Shares to the Underwriters to be sold hereunder, (B) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof of
which the Underwriters have been advised in writing or (C) transactions by any
person other than the Company relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
offering of the Shares. In addition, each Selling Shareholder, agrees that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not, during the period ending 180 days after the
date of the Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
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<PAGE> 11
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1998, or at such other time on the same or such other
date, not later than _________, 1998, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "CLOSING
DATE."
Payment for any Additional Shares shall be made to the Company in
federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than _______, 1998, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [__________] (New York City time) on the date hereof.
The several obligations of the Underwriters hereunder are subject to
the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
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<PAGE> 12
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company, to the effect
set forth in Section 6(a)(i) above and to the effect that the
representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
The officers signing and delivering such certificate may rely
upon the best of their knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Brobeck, Phleger & Harrison LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the state of California, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries,
taken as a whole;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares
to be sold by the Selling Shareholders) outstanding prior to
the issuance of the Shares to be sold by the Company have been
duly authorized and are validly issued, fully paid and
non-assessable; except as set forth in the Prospectus, neither
the Company nor any subsidiary has outstanding any options to
purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights,
convertible securities or obligations; and all outstanding
shares of capital stock and options and other rights to
acquire capital stock have been issued in compliance with the
registration and qualification provisions of all applicable
securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar
rights.
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<PAGE> 13
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
are owned directly by the Company, free and clear of any
security interest, lien, encumbrance, equity, claim or adverse
interest of any nature;
(vi) the Shares to be sold by the Company have been
duly authorized and, when issued and delivered in accordance
with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive rights, rights of first
refusal or similar rights;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or bylaws of the
Company or any subsidiary or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or, to the
best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or
Blue Sky laws of the various states and jurisdictions in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the
captions "Risk factors-- Control by Directors, Executive
Officers and Their Affiliates," "Risk Factors--Shares Eligible
for Future Sale," "Dividend Policy," "Business--Customers and
Strategic Relationships," "Management," "Certain
Transactions," "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the
matters referred to therein;
(x) after due inquiry, such counsel does not know of
any legal, regulatory or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is
a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations,
contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not
described or filed as required;
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<PAGE> 14
(xi) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) there is no legal or beneficial owner of any
securities of the Company who has any rights, not effectively
satisfied or waived, to require registration of any shares of
capital stock of the Company in connection with the filing of
the Registration Statement;
(xiii) such counsel is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data derived therefrom, as to which such counsel need not
express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder;
(xiv) such counsel (A) has no reason to believe that
(except for financial statements and schedules and other
financial and statistical data derived therefrom, as to which
such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading and (B) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data derived therefrom, as
to which such counsel need not express any belief) the
Prospectus contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading;
(xv) to the best of such counsel's knowledge: (A) the
Registration Statement has become effective under the
Securities Act, no stop order proceedings with respect thereto
have been instituted or are pending or threatened under the
Securities Act and nothing has come to such counsel's
attention to lead it to believe that such proceedings are
contemplated; and (B) any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time
period required by such Rule 424(b); and
(xvi) the Shares to be sold under this Agreement to
the Underwriters are duly authorized for listing on the Nasdaq
National Market.
(d) The Underwriters shall have received on the Closing Date
an opinion of [Brobeck, Phleger & Harrison LLP], counsel for the
Selling Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling
Shareholders;
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<PAGE> 15
(ii) the execution and delivery by each Selling
Shareholder of, and the performance by such Selling
Shareholder of its obligations under, this Agreement and the
Custody Agreement and Powers of Attorney of such Selling
Shareholder will not contravene any provision of applicable
law, or the certificate of incorporation or by-laws of such
Selling Shareholder (if such Selling Shareholder is a
corporation), or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon such Selling
Shareholder or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Shareholder, and
no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is
required for the performance by such Selling Shareholder of
its obligations under this Agreement or the Custody Agreement
or Power of Attorney of such Selling Shareholder, except such
as may be required by the securities or Blue Sky laws of the
various states in connection with offer and sale of the
Shares;
(iii) each of the Selling Shareholders has valid
title to the Shares to be sold by such Selling Shareholder and
the legal right and power, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and Power of Attorney of such Selling Shareholder
and to sell, transfer and deliver the Shares to be sold by
such Selling Shareholder;
(iv) the Custody Agreement and the Power of Attorney
of each Selling Shareholder have been duly authorized,
executed and delivered by such Selling Shareholder and are
valid and binding agreements of such Selling Shareholder;
(v) delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such
Shares free and clear of any security interests, claims,
liens, equities and other encumbrances;
(vi) such counsel is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data derived therefrom, included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder; and
(vii) such counsel (A) has no reason to believe that
(except for financial statements and schedules and other
financial and statistical data derived therefrom, as to which
such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading and (B) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data derived therefrom, as
to which such counsel need not express any belief) the
Prospectus contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
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<PAGE> 16
(e) The Underwriters shall have received on the Closing Date
an opinion of ____________________, special patent counsel to the
Company, dated the Closing Date, to the effect that:
(i) the Company is listed in the records of the
United States Patent and Trademark Office ("PTO") as the
holder of record of the patent applications listed in Exhibit
A hereto (the "PATENT APPLICATIONS"). Two of such Patent
Applications, listed on Exhibit B hereto, have been allowed or
indicated as containing allowable subject matter. To such
counsel's knowledge, written assignments to the Company of all
ownership interests in the Patent Applications have been duly
authorized, executed and delivered by all of the inventors in
accordance with their terms. To such counsel's knowledge,
there is no claim of any party other than the Company to any
ownership interest or lien with respect to any of the Patent
Applications;
(ii) the statements in the Prospectus under the
captions "Risk Factors -- Risks Associated With Intellectual
Property Protection," "Business -- Intellectual Property" and
"Business -- Litigation" (the "INTELLECTUAL PROPERTY
PORTIONS"), to our knowledge, insofar as such statements
relate to the Patent applications or any legal matters,
documents and proceedings relating thereto fairly present the
information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein; and such counsel concurs with the
Company's belief as stated in the fourth sentence of the first
paragraph of "Business--Litigation."
(iii) to such counsel's knowledge, other than in
connection with assertions or inquiries made by patent office
examiners in the ordinary course of the prosecution of the
Company's Patent Applications, there is not pending or
threatened in writing any action, suit, proceeding or claim by
others (A) challenging the validity or scope of the Patent
Applications or any other material patent or patent
applications held by or licensed to the Company, or (B) other
than as disclosed to the Underwriters in writing, asserting
that any patent is infringed by the activities of the Company
described in the Prospectus or by the manufacture, use or sale
of any of the Company's products or other items made and used
according to the Patent Applications held by or licensed to
the Company.
(iv) to such counsel's knowledge, there is not
pending or threatened in writing any action, suit, proceeding
or claim by the Company asserting infringement on the part of
any third party of the Patent Applications or any other
patents or patent applications held by or licensed to the
Company, except as set forth in such counsel's opinion letter
dated __________, 1998, addressed to the Company, attached
hereto as Exhibit C.
(v) such counsel does not know of any contracts or
other documents relating to patents or proprietary information
of a character required to be filed as exhibits to the
Registration Statement or the Prospectus or required to be
described in the Registration Statement or the Prospectus that
are not filed or described as required.
(vi) such counsel has participated in conferences
with employees of the Company at which the Patent Applications
of the Company as disclosed in the Intellectual
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<PAGE> 17
Property Portions of the Registration Statement were
discussed, and although such counsel is not passing upon and
does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement (except to the extent stated in
paragraph (ii) above), on the basis of such conferences and
such representation of the Company, nothing has come to such
counsel's attention which leads them to believe that the
Intellectual Property Portions of the Registration Statement
and the Prospectus included therein at the time the
Registration Statement became effective did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading and (3) believes
that (except for financial statements and schedules and other
financial and statistical data derived therefrom, as to which
such counsel need not express any belief) the Prospectus, as
amended or supplemented, if applicable, does not contain any
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(f) The Underwriters shall have received on the Closing Date
an opinion of Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to
in Sections 6(c)(vi), 6(c)(vii), 6(c)(ix) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 6(c)(xiii) above.
With respect to Section 6(c)(xiv) above, Brobeck, Phleger &
Harrison LLP and Wilson Sonsini Goodrich & Rosati and with respect to
Section 6(d)(vii) above, [Brobeck, Phleger & Harrison LLP] may state
that their belief is based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof,
but are without independent check or verification, except as specified.
With respect to Section 6(d) above, [Brobeck, Phleger & Harrison LLP]
may rely upon an opinion or opinions of counsel for any Selling
Shareholders and, with respect to factual matters and to the extent
such counsel deems appropriate, upon the representations of each
Selling Shareholder contained herein and in the Custody Agreement and
Power of Attorney of such Selling Shareholder and in other documents
and instruments; provided that (A) each such counsel for the Selling
Shareholders is satisfactory to your counsel, (B) a copy of each
opinion so relied upon is delivered to you and is in form and substance
satisfactory to your counsel, (C) copies of such Custody Agreements and
Powers of Attorney and of any such other documents and instruments
shall be delivered to you and shall be in form and substance
satisfactory to your counsel and Brobeck, Phleger & Harrison LLP shall
state in their opinion that they are justified in relying on each such
other opinion.
The opinions of Brobeck, Phleger & Harrison LLP described in
Sections 6(c) and 6(d) above (and any opinions of counsel for any
Selling Shareholder referred to in the immediately preceding paragraph)
and the opinion of ___________ described in Section 6(e) above shall be
rendered to the Underwriters at the request of the Company or one or
more of the Selling Shareholders, as the case may be, and shall so
state therein.
(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Ernst & Young LLP, independent public
accountants,
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<PAGE> 18
containing statements and information of the type ordinarily included
in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided, however, that the
letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form
attached hereto as Exhibit A hereto, between you and certain
shareholders, officers and directors of the Company relating to sales
and certain other dispositions of shares of Common Stock or certain
other securities, delivered to you on or before the date hereof, shall
be in full force and effect on the Closing Date.
All of the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement shall be deemed in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters, shall be reasonably satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares, other matters related to the issuance of the Additional Shares and an
opinion or opinions of Brobeck Phleger and Harrison LLP in form and substance
satisfactory to Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters.
7. COVENANTS OF THE COMPANY. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five signed copies of
the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and to furnish to you in New York
City, without charge, prior to 10:00 a.m. New York City time on the
business day following the date of this Agreement and during the period
mentioned in Section 7(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names
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<PAGE> 19
and addresses you will furnish to the Company) to which Shares may have
been sold by you on behalf of the Underwriters and to any other dealers
upon request, either amendments or supplements to the Prospectus so
that the statements in the Prospectus as so amended or supplemented
will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement
covering the twelve-month period ending ________, 1999 that satisfies
the provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) that in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale, transfer, assignment, pledge
or hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Morgan Stanley will notify
the Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time.
(g) to pay all fees and disbursements of counsel incurred by
the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred
by the Underwriters in connection with the Directed Share Program.
(h) to (i) enforce the terms of each Lock-up Agreement, (ii)
issue stop-transfer instructions to the transfer agent for the Common
Stock with respect to any transaction or contemplated transaction that
would constitute a breach of or default under the applicable Lock-up
Agreement and (iii) upon written request of Morgan Stanley & Co.
Incorporated, to release from the Lock-up Agreements those shares of
Common Stock held by those holders set forth in such request. In
addition, except with the prior written consent of Morgan Stanley & Co.
Incorporated, the Company agrees (i) not to amend or terminate, or
waive any right under, any Lock-up Agreement, or take any other action
that would directly or indirectly have the same effect as an amendment
or termination, or waiver of any right under, any Lock-up Agreement,
that would permit any holder of shares of Common Stock, or securities
convertible into or exercisable or exchangeable for Common Stock, to
sell, make any short sale of, grant any option for the purchase of, or
otherwise transfer or dispose of, any of such shares of Common Stock or
other securities prior to the expiration of 180 days after the date of
the Prospectus, and (ii) not to consent to any sale, short sale, grant
of an option for the purchase of, or other disposition or transfer of
shares of Common Stock, or securities convertible into or exercisable
or exchangeable for Common Stock, subject to a Lock-up Agreement.
(i) to place a restrictive legend on any shares of Common
Stock acquired pursuant to the exercise, after the date hereof and
prior to the expiration of the 180-day period after the date of the
initial public offering of the Shares, of any option granted under the
Option Plan, which legend shall restrict the transfer of such shares
prior to the expiration of such 180-day period. In addition,
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<PAGE> 20
the Company agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not release any shareholder or
option holder from the market standoff provision imposed by the Company
pursuant to the terms of the Option Plan earlier than 180 days after
the date of the initial public offering of the Shares.
Furthermore, the Company covenants with Morgan Stanley that
the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in
which the Directed Shares are offered in connection with the Directed
Share Program.
8. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under securities laws of various states and other jurisdictions and all
expenses in connection with the qualification of the Shares for offer and sale
under state securities laws as provided in paragraph (d) of Section 7 hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection with such qualification and in connection with
the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the
reasonable fees and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the Shares by
the NASD, (v) all fees and expenses in connection with the preparation and
filing of the registration statement on Form 8-A relating to the Class A Common
Stock and all costs and expenses incident to listing the Shares on the Nasdaq
National Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or depositary,
(viii) the costs and expenses of the Company relating to investor presentations
on any "road show" undertaken in connection with the marketing of the offering
of the Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, (ix) all
expenses in connection with any offer and sale of the Shares outside of the
United States, including filing fees and the reasonable fees and disbursements
of counsel for the Underwriters in connection with offers and sales outside of
the United States, and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision is
not otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 9 entitled "Indemnity and Contribution", and
the last paragraph of Section 11 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect
any agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
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<PAGE> 21
9. INDEMNITY AND CONTRIBUTION.
(a) The Sellers, jointly and severally, agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls
any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if
the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein;
provided, however, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any
Underwriter, or any person controlling such Underwriter, from whom the
person asserting any such losses, claims, damages or liabilities
purchased Shares, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability. The liability of each Selling Shareholder
under the indemnity agreement contained in this paragraph shall be
limited to an amount equal to the gross proceeds received by such
Selling Shareholder from the offering of the Shares sold by such
Selling Shareholder.
(b) The Company agrees to indemnify and hold harmless Morgan
Stanley and each person, if any, who controls Morgan Stanley within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any and all
losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any
untrue statement or alleged untrue statement of a material fact
contained in the prospectus wrapper material prepared by or with the
consent of the Company for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus
or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary
prospectus, not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii)
related to, arising out of, or in connection with the Directed Share
Program, provided that, the Company shall not be responsible under this
subparagraph (iii) for any losses, claim, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to
have resulted from the bad faith or gross negligence of Morgan Stanley
Entities.
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<PAGE> 22
(c) Each Selling Shareholder agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its
officers who sign the Registration Statement and each person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with
reference to information relating to such Selling Shareholder furnished
in writing by or on behalf of such Selling Shareholder expressly for
use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use in
the Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto.
(e) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c),
such person (the "INDEMNIFIED PARTY") shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the Indemnifying Party, upon request of the Indemnified
Party, shall retain counsel reasonably satisfactory to the Indemnified
Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any Indemnified Party shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such Indemnified Party unless (i) the Indemnifying
Party and the Indemnified Party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
Indemnifying Party shall not, in respect of the legal expenses of any
Indemnified Party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all
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<PAGE> 23
Underwriters and all persons, if any, who control any Underwriter
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, (ii) the fees and expenses of more than
one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of
either such Section and (iii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Selling
Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the
case of any such separate firm for the Underwriters and such control
persons of any Underwriters, such firm shall be designated in writing
by Morgan Stanley & Co. Incorporated. In the case of any such separate
firm for the Company, and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the
Company. In the case of any such separate firm for the Selling
Shareholders and such control persons of any Selling Shareholders, such
firm shall be designated in writing by the persons named as
attorneys-in-fact for the Selling Shareholders under the Powers of
Attorney. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 9(b) hereof in respect of
such action or proceeding, then in addition to such separate firm for
the Indemnified Parties, the Indemnifying Party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in
addition to any local counsel) for Morgan Stanley for the defense of
any losses, claims, damages and liabilities arising out of the Directed
Share Program, and all persons, if any, who control Morgan Stanley
within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the
plaintiff, the Indemnifying Party agrees to indemnify the Indemnified
Party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an Indemnified Party shall have requested an Indemnifying
Party to reimburse the Indemnified Party for fees and expenses of
counsel as contemplated by the second and third sentences of this
paragraph, the Indemnifying Party agrees that it shall be liable for
any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt
by such Indemnifying Party of the aforesaid request and (ii) such
Indemnifying Party shall not have reimbursed the Indemnified Party in
accordance with such request prior to the date of such settlement. No
Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Party is or could have
been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are
the subject matter of such proceeding.
(f) To the extent the indemnification provided for in Section
9(a), 9(b) or 9(c) is unavailable to an Indemnified Party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party under such paragraph,
in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the Indemnifying Party or parties on the one hand and the
Indemnified Party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause 9(e)(i) above is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 9(e)(i)
above but also the relative fault of the Indemnifying Party or parties
on the one hand and of the Indemnified
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<PAGE> 24
Party or parties on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities,
as well as any other relevant equitable considerations. The relative
benefits received by the Sellers on the one hand and the Underwriters
on the other hand in connection with the offering of the Shares shall
be deemed to be in the same respective proportions as the net proceeds
from the offering of the Shares (before deducting expenses) received by
each Seller and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on
the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Sellers on the one hand
and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Sellers or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute
pursuant to this Section 9 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(g) The Sellers and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in Section 9(e). The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section
9 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any Indemnified Party at law or in
equity.
(h) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements
of the Company and the Selling Shareholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter,
any Selling Shareholder or any person controlling any Selling
Shareholder, or the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of
the Shares.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the NASD, the Chicago
Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board
of Trade, (ii) trading of any securities of
-24-
<PAGE> 25
the Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either federal or New York State authorities or (iv)
there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses 10(a)(i) through 10(a)(iv), such event, singly or together with any
other such event, makes it, in your judgment, impracticable to market the Shares
on the terms and in the manner contemplated in the Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule II bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided, however, that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you, the
Company and the Selling Shareholders for the purchase of such Firm Shares are
not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders. In any such case either you or the relevant Sellers
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
-25-
<PAGE> 26
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
-26-
<PAGE> 27
Very truly yours,
BROADCOM CORPORATION
By:
--------------------------------
Name:
Title:
FOUNDERS
------------------------------------
Henry T. Nicholas
------------------------------------
Henry Samueli
------------------------------------
The Selling Shareholders
named in Schedule I hereto,
acting severally
By:
--------------------------------
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Hambrecht & Quist LLC
Deutsche Morgan Grenfell Inc.
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------
Name:
Title:
-27-
<PAGE> 28
SCHEDULE I
NUMBER OF
FIRM
SHARES
SELLING SHAREHOLDER TO BE SOLD
- -------------------------------- ----------
[NAMES OF SELLING SHAREHOLDERS]
----------
Total...........................
==========
I-1
<PAGE> 29
SCHEDULE II
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITER PURCHASED
- -------------------------------- -----------
Morgan Stanley & Co. Incorporated......................
BT Alex. Brown Incorporated............................
Hambrecht & Quest LLC..................................
Deutsche Morgan Grenfell Inc. .........................
[NAMES OF OTHER UNDERWRITERS]..........................
----------
Total...........................
==========
II-1
<PAGE> 30
SCHEDULE III
NUMBER OF
ADDITIONAL
SHARES
SELLING SHAREHOLDER TO BE SOLD
- -------------------------------- ----------
[NAMES OF SELLING SHAREHOLDERS]
----------
Total...........................
==========
III-1
<PAGE> 31
EXHIBIT A
[FORM OF LOCK-UP LETTER]
________________, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Hambrecht & Quist LLC
Deutsche Morgan Grenfell Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Broadcom Corporation, a California corporation
(together with any successor Delaware corporation, the "COMPANY") providing for
the public offering (the "PUBLIC OFFERING") by the several Underwriters,
including Morgan Stanley (the "UNDERWRITERS"), of ______________ shares (the
"SHARES") of the Common Stock (including par value) of the Company (the "COMMON
STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to
-1-
<PAGE> 32
shares of Common Stock or other securities acquired in open market transactions
after the completion of the Public Offering. In addition, the undersigned agrees
that, without the prior written consent of Morgan Stanley on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
The undersigned hereby acknowledges that this agreement is valid and
binding notwithstanding any prior agreements relating to this matter and further
agrees and consents to the entry of stop-transfer instructions with the
Company's transfer agent against the transfer of shares of Common Stock held by
the undersigned except in compliance with the terms and conditions of this
agreement. The undersigned also understands that the Company and the
Underwriters will proceed with the Public Offering in reliance on this Lock-Up
Agreement. Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-------------------------------------
Name of Shareholder
-------------------------------------
Signature of Authorized Signatory
-------------------------------------
Print Name and Title, if applicable
-2-
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
BROADCOM CORPORATION,
a California Corporation
The undersigned Henry T. Nicholas and William J. Ruehle hereby
certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The Articles of Incorporation of said corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Broadcom Corporation.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. Classes of Stock; Stock Split; Conversion Into Class B Common Stock.
1. Classes of Stock. This corporation is authorized to issue three
classes of stock to be designated, respectively, "Class A Common Stock," "Class
B Common Stock" and "Preferred Stock." The Class A Common Stock and Class B
Common Stock are hereinafter referred to collectively as "Common Stock." The
total number of shares of stock which the corporation is authorized to issue is
Three Hundred and Ten Million (310,000,000) shares. Two Hundred Million
(200,000,000) shares shall be Class A Common Stock, par value $.0001 per share,
One Hundred Million (100,000,000) shares shall be Class B Common Stock, par
value $.0001 per share, and Ten Million (10,000,000) shares shall be Preferred
Stock, par value $.0001 per share.
2. Stock Split; Conversion Into Class B Common Stock. Upon the
effectiveness of these amended and restated Articles of Incorporation, each
outstanding share
1
<PAGE> 2
of Common Stock of the corporation will automatically be converted, without any
further action on the part of the holder thereof, into one and one-half (1.5)
shares of Class B Common Stock.
B. Common Stock. The Board of Directors of the corporation may authorize
the issuance of shares of Class A Common Stock and shares of Class B Common
Stock from time to time. Shares of Common Stock that are redeemed, purchased or
otherwise acquired by the corporation may be reissued except as otherwise
provided by law. The Board of Directors shall have no power to alter the rights
with respect to Class A Common Stock or Class B Common Stock.
1. Dividends and Distributions. Subject to the preferences
applicable to Preferred Stock outstanding at any time, the holders of shares of
Class A Common Stock and the holders of shares of Class B Common Stock shall be
entitled to receive such dividends, payable in cash or otherwise, as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the corporation legally available therefor, provided that the holders
of shares of Class A Common Stock and shares of Class B Common Stock shall be
entitled to share equally, on a per share basis, in such dividends, subject to
the limitations described below. If dividends or other distributions are
declared that are payable in shares of Class A Common Stock or shares of Class B
Common Stock, including distributions pursuant to stock subdivisions or
combinations of Class A Common Stock or Class B Common Stock which occur after
the first date upon which the corporation has issued shares of both Class A
Common Stock and Class B Common Stock, only shares of Class A Common Stock shall
be distributed with respect to Class A Common Stock and only shares of Class B
Common Stock shall be distributed with respect to Class B Common Stock, unless
the Board of Directors of the corporation determines in its discretion that it
is more desirable to distribute shares of Class A Common Stock with respect to
Class B Common Stock, in which case shares of Class A Common Stock shall be
distributed with respect to Class B Common Stock, provided that the number of
shares of Class A Common Stock that shall be distributed with respect to Class B
Common Stock shall be equal to the number of shares of Class B Common Stock that
otherwise would have been distributed. If the corporation shall in any manner
subdivide or combine the outstanding shares of Class A Common Stock or Class B
Common Stock, the outstanding shares of the other such series of Common Stock
shall be proportionately subdivided or combined in the same manner and on the
same basis as the outstanding shares of Class A Common Stock or Class B Common
Stock, as the case may be, which have been subdivided or combined.
2. Voting Rights. The holders of shares of Class A Common Stock and
of Class B Common Stock shall have the following voting rights:
a. Each share of Class A Common Stock shall entitle the holder
thereof to one (1) vote on all matters submitted to a vote of the shareholders
of the corporation.
2
<PAGE> 3
b. Each share of Class B Common Stock shall entitle the holder
thereof to ten (10) votes on all matters submitted to a vote of the shareholders
of the corporation.
c. The holders of shares of Class A Common Stock and the
holders of shares of Class B Common Stock shall vote together as one class on
all matters submitted to a vote of shareholders of the corporation, except (i)
as otherwise required by applicable law and (ii) in the case of a proposed
issuance of shares of Class B Common Stock, which issuance shall require the
affirmative vote of the holders of a majority of the outstanding shares of Class
B Common Stock voting separately as a class.
3. Transfer of Class B Common Stock to Permitted Transferee.
a. Except as provided in Section 3(b) or Section 4 of this
Article IIIB, no person holding shares of Class B Common Stock or any beneficial
interest therein (a "Class B Holder") may voluntarily or involuntarily transfer
(including without limitation the power to vote such shares of Class B Common
Stock by proxy or otherwise except for proxies given to any Permitted Transferee
of the Class B Holder), sell, assign, devise or bequeath any of such Class B
Holder's interest in his Class B Common Stock, and the corporation and the
transfer agent for the Class B Common Stock, if any (the "Transfer Agent"),
shall not register the transfer of such shares of Class B Common Stock, whether
by sale, grant of proxy, assignment, gift, devise, bequest, appointment or
otherwise, except to a "Permitted Transferee" of such Class B Holder, which term
shall include the corporation and shall have the following additional meanings
in the following cases:
(i) In the case of a Class B Holder who is a natural person
holding record and beneficial ownership of the shares of Class B
Common Stock in question, "Permitted Transferee" means: (a) the
spouse of such Class B Holder (the "Spouse"); (b) a lineal
descendant, or the spouse of such lineal descendant (collectively,
"Descendants"), of such Class B Holder or of the Spouse; (c) the
trustee of a trust (including a voting trust) for the benefit of
such Class B Holder, the Spouse, other Descendants, or an
organization contributions to which are deductible for federal
income, estate or gift tax purposes (a "Charitable Organization"),
and for the benefit of no other person; provided that such trust may
grant a general or special power of appointment to the Spouse or to
the Descendants and may permit trust assets to be used to pay taxes,
legacies and other obligations of the trust or of the estate of such
Class B Holder payable by reason of the death of such Class B Holder
or the death of the Spouse or a Descendant, and that such trust
(subject to the grant of a power of appointment as provided above)
must prohibit transfer of shares of Class B Common Stock or a
beneficial interest therein to persons other than Permitted
Transferees as defined in subparagraph (ii) of this Section 3(a) (a
"Trust"); (d) a Charitable
3
<PAGE> 4
Organization established by such Class B Holder or a Descendant; (e)
an Individual Retirement Account, as defined in Section 408(a) of
the Internal Revenue Code, of which such Class B Holder is a
participant or beneficiary, provided that such Class B Holder is
vested with the power to direct the investment of funds deposited
into such Individual Retirement Account and to control the voting of
securities held by such Individual Retirement Account (an "IRA");
(f) a pension, profit sharing, stock bonus or other type of plan or
trust of which such Class B Holder is a participant or beneficiary
and which satisfies the requirements for qualification under Section
401 of the Internal Revenue Code, provided that such Class B Holder
is vested with the power to direct the investment of funds deposited
into such plan or trust and to control the voting of securities held
by such plan or trust, (a "Plan"); (g) a corporation all of the
outstanding capital stock of which is owned by, or a partnership all
of the partners of which are, such Class B Holder, his or her
Spouse, his or her Descendants, any Permitted Transferee of the
Class B Holder and/or any other Class B Holder or its Permitted
Transferee determined pursuant to this subparagraph (i) of this
Section 3(a), provided that if any share (or any interest in any
share) of capital stock of such a corporation (or of any survivor of
a merger or consolidation of such corporation), or any partnership
interest in such a partnership, is acquired by any person who is not
within such class of persons, all shares of Class B Common Stock
then held by such corporation or partnership, as the case may be,
shall be deemed without further act on anyone's part to be converted
into shares of Class A Common Stock and stock certificates formerly
representing such shares of Class B Common Stock shall thereupon and
thereafter be deemed to represent the like number of shares of Class
A Common Stock in the manner set forth in Section 4(b) of this
Article IIIB; (h) another Class B Holder or such Class B Holder's
Permitted Transferee determined pursuant to this subparagraph (i) of
this Section 3(a); and (i) in the event of the death of such Class B
Holder, such Class B Holder's estate.
(ii) In the case of a Class B Holder holding the shares of
Class B Common Stock in question as trustee of an IRA, a Plan or a
Trust other than a Trust described in subparagraph (iii) of this
Section 3(a), "Permitted Transferee" means: (a) any participant in
or beneficiary of such IRA, such Plan or such Trust, or the person
who transferred such shares of Class B Common Stock to such IRA,
such Plan or such Trust, and (b) a Permitted Transferee of any such
person or persons determined pursuant to subparagraph (i) of this
Section 3(a).
(iii) In the case of a Class B Holder holding the shares of
Class B Common Stock in question as trustee pursuant to a Trust
which was irrevocable on the Record Date (as defined below),
"Permitted Transferee" means any
4
<PAGE> 5
person as of the Record Date to whom or for whose benefit principal
may be distributed either during or at the end of the term of such
Trust whether by power of appointment or otherwise. For purposes of
these Articles of Incorporation, there shall be one "Record Date,"
which date shall be the date that is the record date for determining
the persons to whom the Class B Common Stock is first distributed by
the corporation.
(iv) In the case of a Class B Holder holding record (but not
beneficial) ownership of the shares of Class B Common Stock in
question as nominee for the person who was the beneficial owner
thereof on the Record Date, "Permitted Transferee" means such
beneficial owner and a Permitted Transferee of such beneficial owner
determined pursuant to subparagraph (i), (ii), (iii), (v) or (vi) of
this Section 3(a), as the case may be.
(v) In the case of a Class B Holder that is a partnership
holding record and beneficial ownership of the shares of Class B
Common Stock in question, "Permitted Transferee" means any partner
of such partnership, provided that such partner was a partner in the
partnership at the time it first became a Class B Holder, or any
Permitted Transferee of such partner determined pursuant to
subparagraph (i) of this Section 3(a).
(vi) In the case of a Class B Holder that is a corporation,
other than a Charitable Organization described in clause (d) of
subparagraph (i) of this Section 3(a), holding record and beneficial
ownership of the shares of Class B Common Stock in question (a
"Corporate Holder"), "Permitted Transferee" means (a) any
shareholder of such Corporate Holder, provided that such shareholder
was a shareholder of the Corporate Holder at the time it first
became a Class B Holder, or any Permitted Transferee of any such
shareholder determined pursuant to subparagraph (i) of this Section
3(a); and (b) the survivor (the "Survivor") of a merger or
consolidation of such Corporate Holder, so long as such Survivor is
controlled, directly or indirectly, by those shareholders of the
Corporate Holder who were shareholders of the Corporate Holder at
the time the Corporate Holder first became a Class B Holder or any
Permitted Transferees of such shareholders determined pursuant to
subparagraph (i) of this Section 3(a).
(vii) In the case of a Class B Holder that is the estate of a
deceased Class B Holder, or that is the estate of a bankrupt or
insolvent Class B Holder, and provided such deceased, bankrupt or
insolvent Class B Holder, as the case may be, held record and
beneficial ownership of the shares of Class B Common Stock in
question, "Permitted Transferee" means a Permitted Transferee of
such deceased, bankrupt or insolvent Class B Holder as determined
pursuant to
5
<PAGE> 6
subparagraphs (i), (v) or (vi) of this Section 3(a), as the case may
be.
(viii) In the case of any Class B Holder who desires to make a
bona fide gift, "Permitted Transferee" means any other Class B
Holder or its Permitted Transferee determined pursuant to
subparagraph (i) of this Section 3(a).
(ix) In the case of any Class B Holder, "Permitted Transferee"
means any person or entity that will hold record (but not
beneficial) ownership of the shares of Class B Stock in question as
nominee for the Class B Holder or its Permitted Transferee
determined pursuant to subparagraph (i), (ii), (iii), (v) or (vi) of
this Section 3(a), as the case may be.
b. Notwithstanding anything to the contrary set forth herein,
any Class B Holder may pledge such holder's shares of Class B Common Stock to a
pledgee pursuant to a bona fide pledge of such shares as collateral security for
indebtedness due to the pledgee, provided that such shares shall not be
transferred to, registered in the name of or voted by the pledgee and shall
remain subject to this Section 3. In the event of foreclosure or other similar
action by the pledgee, such pledged shares of Class B Common Stock may only be
transferred to a Permitted Transferee of the pledgor or converted into shares of
Class A Common Stock, as the pledgee may elect.
c. For purposes of this Section 3:
(i) The relationship of any person that is derived by or
through legal adoption shall be considered a natural relationship.
(ii) Each joint owner of shares (if a Permitted Transferee) or
owner of a community property interest in shares (if a Permitted
Transferee) of Class B Common Stock shall be considered a "Class B
Holder" of such shares.
(iii) A minor for whom shares of Class B Common Stock are held
pursuant to a Uniform Transfer to Minors Act or similar law shall be
considered a Class B Holder of such shares.
(iv) Unless otherwise specified, the term "person" means and
includes natural persons, corporations, partnerships, unincorporated
associations, firms, joint ventures, trusts and all other entities.
(v) The conversion of Class B Common Stock into securities of
another corporation in connection with a merger effected for the
purpose of reincorporating the corporation in another state shall
not constitute a transfer of such Class B Common Stock.
6
<PAGE> 7
d. Except as otherwise provided in Section 4(b), any purported
transfer of shares of Class B Common Stock not permitted hereunder shall be void
and of no effect, and the purported transferee shall have no rights as a
shareholder of the corporation and no other rights against or with respect to
the corporation. The corporation may, as a condition to the transfer or the
registration of transfer of shares of Class B Common Stock to a purported
Permitted Transferee, require the furnishing of such affidavits or other proof
as it deems necessary to establish that such transferee is a Permitted
Transferee. Each certificate representing shares of Class B Common Stock shall
be endorsed with a legend that states that shares of Class B Common Stock are
not transferable other than to certain transferees and are subject to certain
restrictions as set forth in the Articles of Incorporation filed by the
corporation with the Secretary of State of the State of California.
4. Transfer of Class B Common Stock to Person Other than Permitted
Transferee; Conversion and Exchange of Class B Common Stock.
a. Each share of Class B Common Stock, at the option of its
holder, may at any time be converted into one (1) fully paid and nonassessable
share of Class A Common Stock. Such right shall be exercised by the surrender of
the certificate representing such share of Class B Common Stock to be converted
to the corporation at any time during normal business hours at the principal
executive offices of the corporation or at the office of the Transfer Agent,
accompanied by a written notice of the election by the holder thereof to convert
and (if so required by the corporation or the Transfer Agent) by instruments of
transfer, in form satisfactory to the corporation and to the Transfer Agent,
duly executed by such holder or such holder's duly authorized attorney, and
transfer tax stamps or funds therefor, if required pursuant to Section 4(e).
b. If the beneficial ownership (as determined under Rule 13d-3
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended) of any share or any interest in any share of
Class B Common Stock changes, voluntarily or involuntarily, such that each new
beneficial owner of such share is not a "Permitted Transferee" (as defined in
Section 3(a) of this Article IIIB) of the beneficial owner of such share of
Class B Common Stock immediately prior to such change in beneficial ownership,
then each such share shall thereupon be converted automatically into one (1)
fully paid and nonassessable share of Class A Common Stock. A determination by
the Secretary of the corporation that a change in beneficial ownership requires
conversion under this paragraph shall be conclusive. Upon making such
determination, the Secretary of the corporation shall promptly request of the
holder of record of each such share that each such holder promptly deliver, and
each such holder shall promptly deliver, the certificate representing each such
share to the corporation for documentation of such conversion, together with
instruments of transfer, in form satisfactory to the corporation and Transfer
Agent, duly executed by such holder or such holder's duly authorized attorney,
and together with transfer tax stamps or funds therefor, if required pursuant to
Section 4(e) of this Article IIIB.
7
<PAGE> 8
c. As promptly as practicable following the surrender for
conversion of a certificate representing shares of Class B Common Stock in the
manner provided in paragraphs a or b, as applicable, of this Section 4 and the
payment in cash of any amount required by the provisions of Section 4(e) of this
Article IIIB, the corporation will deliver or cause to be delivered at the
office of the Transfer Agent to or upon the written order of the holder of such
certificate, a certificate or certificates representing the number of full
shares of Class A Common Stock issuable upon such conversion, issued in such
name or names as such holder may direct. In the case of a conversion under
Section 4(a) of this Article IIIB, such conversion shall be deemed to have been
made immediately prior to the close of business on the date of the surrender of
the certificate representing shares of Class B Common Stock. In the case of a
conversion under Section 4(b), such conversion shall be deemed to have been made
on the date that the beneficial ownership of such share has changed as set forth
in Section 4(b). Upon the date any conversion under Section 4(a) is made, all
rights of the holder of such shares as such holder shall cease, and the person
or persons in whose name or names the certificate or certificates representing
the shares of Class A Common Stock are to be issued shall be treated for all
purposes as having become the record holder or holders of such shares of Class A
Common Stock; provided, however, that any such surrender and payment on any date
when the stock transfer books of the corporation shall be closed shall
constitute the person or persons in whose name or names the certificate or
certificates representing shares of Class A Common Stock are to be issued as the
record holder or holders thereof for all purposes immediately prior to the close
of business on the next succeeding day on which stock transfer books are open.
Upon the date any conversion under Section 4(b) is made, all rights of the
holder of such share as such holder shall cease, and the new beneficial owner or
owners of such shares shall be treated for all purposes as having become the
record holder or holders of such shares of Class A Common Stock.
d. The corporation covenants that it will at all times reserve
and keep available, solely for the purpose of issue upon conversion of the
outstanding shares of Class B Common Stock, such number of shares of Class A
Common Stock as shall be issuable upon the conversion of all such outstanding
shares of Class B Common Stock, provided that nothing contained herein shall be
construed to preclude the corporation from satisfying its obligations in respect
of the conversion of the outstanding shares of Class B Common Stock by delivery
of purchased shares of Class A Common Stock that are held in the treasury of the
corporation. The corporation covenants that if any shares of Class A Common
Stock required to be reserved for purposes of conversion hereunder require
registration with or approval of any governmental authority under any federal or
state law before such shares of Class A Common Stock may be issued upon
conversion, the corporation will cause such shares to be duly registered or
approved, as the case may be. The corporation will endeavor to list the shares
of Class A Common Stock required to be delivered upon conversion prior to such
delivery upon each national securities exchange or automated quotation system
upon which the outstanding Class A Common Stock is listed at the time of such
delivery. The corporation
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covenants that all shares of Class A Common Stock that shall be issued upon
conversion of the shares of fully paid and nonassessable Class B Common Stock
will, upon issue, be fully paid and nonassessable.
e. The issuance of certificates for shares of Class A Common
Stock upon conversion of shares of Class B Common Stock shall be made without
charge for any stamp or other similar tax in respect of such issuance. However,
if any such certificate is to be issued in a name other than that of the holder
of the share or shares of Class B Common Stock converted, then the person or
persons requesting the issuance thereof shall pay to the corporation the amount
of any tax that may be payable in respect of any transfer involved in such
issuance or shall establish to the satisfaction of the corporation that such tax
has been paid.
5. Liquidation Rights. Upon the liquidation, dissolution or winding
up of the corporation, the assets of the corporation shall be distributed as
provided in Section 2 of Article IIIC.
6. Redemption. The Common Stock is not redeemable.
C. Rights, Preferences and Restrictions of Preferred Stock. The Preferred
Stock authorized by these Articles of Incorporation may be issued from time to
time in one or more series. The rights, preferences, privileges, and
restrictions granted to and imposed on the Series A Preferred Stock, which
series shall consist of 500,000 shares, the Series B Preferred Stock, which
series shall consist of 600,000 shares, the Series C Preferred Stock, which
series shall consist of 500,000 shares, the Series D Preferred Stock, which
series shall consist of 500,000 shares, and the Series E Preferred Stock, which
series shall consist of 1,800,000 shares, are as set forth below in this Article
IIIC. The Board of Directors is hereby authorized to fix or alter the rights,
preferences, privileges and restrictions granted to or imposed upon additional
series of Preferred Stock, and the number of shares constituting any such series
and the designation thereof, or of any of them. Subject to compliance with
applicable protective voting rights which have been or may be granted to the
Preferred Stock or series thereof in Certificates of Determination or the
corporation's Articles of Incorporation ("Protective Provisions"), but
notwithstanding any other rights of the Preferred Stock or any series thereof,
the rights, privileges, preferences and restrictions of any such additional
series may be subordinated to, pari passu with (including, without limitation,
inclusion in provisions with respect to liquidation and acquisition preferences,
redemption or approval of matters by vote or written consent), or senior to any
of those of any present or future class or series of Preferred or Common Stock
(other than the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock). Subject
to compliance with applicable Protective Provisions, the Board of Directors is
also authorized to increase or decrease the number of shares of any series
(other than the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series
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<PAGE> 10
E Preferred Stock), prior or subsequent to the issue of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1. Dividend Provisions.
(a) The holders of shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be entitled to receive cash dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any cash dividend on the Common Stock of this corporation, at the
rate of $0.20 per share per annum and no more, payable in cash quarterly in the
months of March, June, September and December, or otherwise when, as and if
declared by the Board of Directors. Such dividends shall not be cumulative. The
Board of Directors shall not declare a dividend on any series of Preferred Stock
unless an equivalent per share dividend is declared on each series of Preferred
Stock that has a preference as to dividends to any declaration or payment of any
cash dividend on the Common Stock.
(b) If the Board of Directors shall elect to make further
distributions of dividends after the preferred dividend on the Preferred Stock
has been paid or declared and set apart for payment to holders of the Preferred
Stock, such dividends shall be made pro rata among the holders of the Common
Stock and the Preferred Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, (i) the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of this corporation to the holders of the Common Stock, an amount per
share equal to the sum of (A) $2.00 for each outstanding share of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, as
adjusted for any stock dividends, combinations or splits with respect to such
shares and (B) an amount equal to declared but unpaid dividends on such shares,
(ii) the holders of the Series D Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of this
corporation to the holders of the Common Stock, an amount per share equal to the
sum of (A) $6.00 for each outstanding share of Series D Preferred Stock, as
adjusted for any stock dividends, combinations or splits with respect to such
shares and (B) an amount equal to declared but unpaid dividends on such shares,
and (iii) the holders of Series E Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of this
corporation to the holders of the Common Stock, an amount per share equal to the
sum of (A) $15.15 for each outstanding share of Series E Preferred Stock, as
adjusted for any stock dividends, combinations or splits with respect to such
shares and (B) an
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<PAGE> 11
amount equal to declared but unpaid dividends on such shares. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
that may from time to time come into existence, the entire assets and funds of
the corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
in proportion to the amount of such stock owned by each such holder.
(b) Upon the completion of the distributions required by Section
2(a) of this Article IIIC and any other distribution that may be required with
respect to series of Preferred Stock that may from time to time come into
existence, if assets remain in this corporation, all of the remaining assets of
this corporation to be distributed shall be distributed ratably among the
holders of the Preferred Stock and Common Stock in proportion to the amount of
such stock owned by each such holder.
(c) A consolidation or merger of the corporation with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of the corporation, shall not be deemed to be a liquidation, dissolution,
or winding up, within the meaning of Section 2(a) of this Article IIIC.
3. Redemption. The Series A Preferred Stock, Series B preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
are not redeemable.
4. Conversion. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Automatic Conversion. Each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall automatically be converted into three (3) fully paid and nonassessable
shares of Class B Common Stock, and each share of Series E Preferred Stock shall
automatically be converted into one and a half (1.5) fully paid and
nonassessable share of Class B Common Stock, upon this corporation's sale of its
Common Stock in an underwritten public offering as long as the value of the
corporation for purposes of the public offering is not less than $45,000,000.
The foregoing conversion rate for the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock gives effect to (i) this corporation's two-for-one stock split
implemented on July 10, 1996, and (ii) this corporation's three-for-two stock
split implemented by these Amended and Restated Articles.
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<PAGE> 12
(b) Right to Convert. Each share of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
corporation or any transfer agent for the Preferred Stock, into (i) in the case
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, three (3) fully paid and nonassessable
shares of Class B Common Stock and (ii) in the case of the Series E Preferred
Stock, one and a half (1.5) fully paid and nonassessable share of Class B Common
Stock. The foregoing conversion rate for the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock gives effect to (i) this corporation's two-for-one stock split
implemented on July 10, 1996, and (ii) this corporation's three-for-two stock
split implemented by these Amended and Restated Articles.
(c) Mechanics of Conversion. Before any holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock shall be entitled to convert the same into
shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation or of
any transfer agent for the Preferred Stock, and shall give written notice to
this corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This corporation
shall, as soon as practicable thereafter issue and deliver at such office to
such holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten public offering of Common Stock, the conversion shall be
conditioned upon the closing with the underwriters of the sale of Common Stock
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock shall not be deemed to have converted such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock until immediately prior to the closing of such sale of
Common Stock.
(d) Adjustment of Conversion Ratio. In the event this corporation
subdivides the outstanding shares of Common Stock, or issues additional shares
of Common Stock as a dividend on shares of Common Stock, the number of shares of
Class B Common
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Stock into which shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
are convertible shall be proportionately increased, and in the event the
corporation combines the outstanding shares of Common Stock, the number of
shares of Class B Common Stock into which shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock are convertible shall be proportionately decreased.
(e) Reorganization or Reclassification. If at any time or from time
to time there shall be a reorganization or any reclassification of the Common
Stock or the Preferred Stock of the corporation, consolidation or merger of the
corporation with or into another corporation, or the conveyance of all or
substantially all of the assets of the corporation into another corporation,
each share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall
thereafter be convertible into the number of shares or other securities or
property to which a holder of the number of shares of Class B Common Stock of
the corporation deliverable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock would have been entitled upon the reorganization,
reclassification, consolidation, merger or conveyance; and in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock, to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as reasonable may be, in relation to any
shares or other property thereafter deliverable upon the conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock.
(f) No Fractional Shares. No fractional shares of Common Stock shall
be issued upon the conversion of any share or shares of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock and the number of shares of Common Stock to be
issued shall be issuable to the nearest whole share. Whether or not fractional
shares are issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
the holder is at the time converting into Common Stock and the number of shares
of Common Stock issuable upon such aggregate conversion.
(g) Reservation of Common Stock Issuable Upon Conversion. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Class B Common Stock, solely for the purpose of effecting
the conversion of the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, such number of its shares of Class B Common
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<PAGE> 14
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock;
and if at any time the number of authorized but unissued shares or Class B
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
in addition to such other remedies as shall be available to the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock, this corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Class B Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendment to these Articles of Incorporation.
(h) Taxes. The corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of Common Stock on
conversion of Preferred Stock pursuant hereto. The corporation shall not,
however, be required to pay any tax payable in respect of any transfer involved
in the issue and delivery of Common Stock in a name other than that in which the
Preferred Stock so converted was registered, and no such issue or delivery shall
be made unless and until the person requesting that issue has paid to the
corporation the amount of any such tax, or has established to the satisfaction
of the corporation that the tax has been paid.
5. Voting Rights. The holder of each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock shall have the right to ten (10) votes for each share
of Class B Common Stock into which such holder's shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock could then be converted, and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, except as otherwise
provided in Section 6 of this Article IIIC or as required by law, and shall be
entitled, notwithstanding any provision hereof, to notice of any shareholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote.
6. Board Participation and Observation.
(a) As long as the holders of Series B Preferred Stock in the
aggregate own not less than 2.5% of the issued and outstanding capital stock of
the corporation (which outstanding capital stock shall be computed on an "as
converted" basis), the holders of the Series B Preferred Stock shall be entitled
to elect two members of the Board of Directors of the corporation; if the
holders of the Series B Preferred Stock own less than 2.5% of the issued
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<PAGE> 15
and outstanding capital stock of the corporation, but 1.25% or more of the
issued and outstanding capital stock of the corporation, the holders of the
Series B Preferred Stock shall be entitled to elect one member of the Board of
Directors.
(b) As long as the holders of Series A Preferred Stock own not less
than 2.5% of the issued and outstanding capital stock of the corporation, the
holders of Series A Preferred Stock shall be entitled to appoint an observer to
attend and participate in all meetings of the Board of Directors of the
corporation on a non-voting basis; provided, however, that upon a vote of a
majority of the Board of Directors that an actual or potential conflict of
interest may arise, the observer appointed by the holders of the Series A
Preferred Stock shall leave the meeting of the Board of Directors. The Board of
Directors of the corporation shall have the right to approve of the choice of
the observer appointed by the holders of the Series A Preferred Stock, which
such approval shall not be unreasonably withheld.
(c) When calculating the percentage of the issued and outstanding
capital stock of the corporation held, by the holders of Series A Preferred
Stock and Series B Preferred Stock pursuant to Sections 6(a) and 6(b) of this
Article IIIC, the following shares shall not be considered issued and
outstanding: (i) up to 8,400,000 shares of Common Stock (after giving effect to
(A) this corporation's two-for-one stock split implemented on July 10, 1996, and
(B) this corporation's three-for-two stock split implemented by these Amended
and Restated Articles) issued pursuant to stock purchase or stock option plans
or other arrangements approved by the Board of Directors and (ii) Common Stock
issued by the corporation in an amount per annum not to exceed 1% of the
corporation's outstanding Common Stock.
7. Protective Provisions. So long as any shares of Preferred Stock are
outstanding, this corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least 75%
of the then outstanding shares of each series of Preferred Stock to be affected
in the manner described in subsections (a), (b) (c) or (d) below (with each
share of Preferred Stock entitled to one vote):
(a) change the rights, preferences, privileges or powers of, or the
restrictions provided for the benefit of, any series of Preferred Stock;
(b) take any action that authorizes, creates or issues shares of any
class of stock having preferences superior to or on a parity with any series of
Preferred Stock;
(c) take any action that reclassifies any outstanding shares into
shares having preferences or priority as to dividends or assets senior to or on
a parity with the preferences of any series of Preferred Stock; and
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<PAGE> 16
(d) amend the corporation's Articles of Incorporation in a manner
that adversely affects the rights, preferences, privileges or powers of any
series of Preferred Stock.
8. Status of Converted Stock. In the event any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be converted pursuant to
Section 4 of this Article IIIC or are reacquired in any manner by the
corporation after the original issuance thereof, the shares so converted or
reacquired shall be cancelled and shall not be issuable by this corporation and
such converted shares shall have none of the rights or preferences set forth in
this Article IIIC. The Articles of Incorporation of this corporation shall be
appropriately amended to effect the corresponding reduction in this
corporation's authorized capital stock.
9. Rights of the Series B Preferred Stock Holders Upon Issuance of
Additional Securities. If the corporation offers to sell its Common Stock,
Preferred Stock or other equity security, any option, warrant or other security
which may be exercised or exchanged for equity securities of the corporation, or
any debt convertible into equity securities of the corporation, it will
concurrently offer to the holders of Series B Preferred Stock for a period of 14
days from receipt of a notice to that effect from the corporation specifying the
terms and conditions of the offering, at a price and on terms no less favorable
than the price and terms of such offer, that number of such securities necessary
to prevent a reduction in the holders of Series B Preferred Stock percentage
ownership of the corporation's capital stock calculated on a fully diluted basis
as of the closing of the offering and taking into account all similar rights
held by other holders of the corporation's debt or equity securities. The right
shall be exercisable by each holder of the Series B Preferred Stock pro rata in
accordance with that holder's then current percentage ownership of Series B
Preferred Stock. In the event one or more of the holders of Series B Preferred
Stock elect not to exercise the right to purchase their full pro rata share of
the offered securities, as provided herein, the remaining holders of Series B
Preferred Stock shall have the right of oversubscription, up to the total number
of securities which the holders of Series B Preferred Stock in the aggregate
have the right to purchase hereunder. Notwithstanding the foregoing, this right
shall not apply to the issuance by the corporation of shares of Common Stock, or
options therefor, (a) in a transaction registered under the Securities Act of
1933, as amended, (b) in a merger or other similar transaction to acquire
another operating business, (c) to employees, officers or directors of the
corporation pursuant to stock purchase or stock option plans or other
arrangements approved by the Board of Directors or (d) in an amount (which
amount shall not include shares of Common Stock issued pursuant to clauses (a),
(b) and (c) above) per annum not to exceed 1% of the corporation's outstanding
Common Stock provided that the price per share of such Common Stock shall be no
less than the fair market value of the Common Stock as determined by the Board
of Directors at the time of issuance.
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10. Rights of the Series A and Series C Preferred Stock Holders Upon
Issuance of Additional Common Stock. If the corporation offers to sell its
Common Stock, Preferred Stock or other equity security, any option warrant or
other security which may be exercised or exchanged for equity securities of the
corporation, or any debt convertible into equity securities of the corporation,
it will concurrently offer to the holders of Series A Preferred Stock and Series
C Preferred Stock for a 14-day period from receipt of a notice to that effect
from the corporation specifying the terms and conditions of the offering, at a
price and on terms comparable to the terms of such offer, that number of such
securities necessary to prevent a reduction in the holders of Series A Preferred
Stock and Series C Preferred Stock percentage ownership of the corporation's
capital stock. Notwithstanding the foregoing, this right shall not apply to the
issuance by the corporation of shares of Common Stock, or options therefor, (a)
in a transaction registered under the Securities Act of 1933, as amended, (b) in
a merger or other similar transaction, (c) to employees, officers or directors
of the corporation pursuant to stock purchase or stock option plans or other
arrangements approved by the Board of Directors or (d) in an amount (which
amount shall not include shares of Common Stock issued pursuant to clauses (a),
(b) and (c) above) per annum not to exceed 1% of the corporation's outstanding
Common Stock provided that the price per share of such Common Stock shall be no
less than the fair market value of the Common Stock as determined by the Board
of Directors at the time of issuance.
11. Rights of the Series D Preferred Stock Holders Upon Issuance of
Additional Securities. If the corporation offers to sell its Common Stock,
Preferred Stock or other equity security, any option warrant or other security
which may be exercised or exchanged for equity securities of the corporation, or
any debt convertible into equity securities of the corporation, it will
concurrently offer to the holders of Series D Preferred Stock for a period of 14
days from receipt of a notice to that effect from the corporation specifying the
terms and conditions of the offering, at a price and on terms no less favorable
than the price and terms of such offer, that number of such securities necessary
to prevent a reduction in the holders of Series D Preferred Stock percentage
ownership of the corporation's capital stock calculated on a fully diluted basis
as of the closing of the offering and taking into account all similar rights
held by other holders of the corporation's debt or equity securities. The right
shall be exercisable by each holder of the Series D Preferred Stock pro rata in
accordance with that holder's then current percentage ownership of Series D
Preferred Stock. In the event one or more of the holders of Series D Preferred
Stock elect not to exercise the right to purchase their full pro rata share of
the offered securities, as provided herein, the remaining holders of Series D
Preferred Stock shall have the right of oversubscription, up to the total number
of securities which the holders of Series D Preferred Stock in the aggregate
have the right to purchase hereunder. Notwithstanding the foregoing, this right
shall not apply to the issuance by the corporation of shares of Common Stock, or
options therefor, (a) in a transaction registered under the Securities Act of
1933, as amended, (b) in a merger or other similar transaction to acquire
another operating business, (c) to employees, officers or directors of the
corporation pursuant to stock purchase or stock option plans or other
arrangements approved by the Board of
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Directors or (d) in an amount (which amount shall not include shares of Common
Stock issued pursuant to clauses (a), (b) and (c) above) per annum not to exceed
1% of the corporation's outstanding Common Stock provided that the price per
share of such Common Stock shall be no less than the fair market value of the
Common Stock as determined by the Board of Directors at the time of issuance.
12. Rights of the Series E Preferred Stock Holders Upon Issuance of
Additional Securities. If the corporation offers to sell its Common Stock,
Preferred Stock or other equity security, any option warrant or other security
which may be exercised or exchanged for equity securities of the corporation, or
any debt convertible into equity securities of the corporation, it will
concurrently offer to the holders of Series E Preferred Stock for a period of 14
days from receipt of a notice to that effect from the corporation specifying the
terms and conditions of the offering, at a price and on terms no less favorable
than the price and terms of such offer, that number of such securities necessary
to prevent a reduction in the holders of Series E Preferred Stock percentage
ownership of the corporation's capital stock calculated on a fully diluted basis
as of the closing of the offering and taking into account all similar rights
held by other holders of the corporation's debt or equity securities. The right
shall be exercisable by each holder of the Series E Preferred Stock pro rata in
accordance with that holder's then current percentage ownership of Series E
Preferred Stock. In the event one or more of the holders of Series E Preferred
Stock elect not to exercise the right to purchase their full pro rata share of
the offered securities, as provided herein, the remaining holders of Series E
Preferred Stock shall have the right of oversubscription, up to the total number
of securities which the holders of Series E Preferred Stock in the aggregate
have the right to purchase hereunder. Notwithstanding the foregoing, this right
shall not apply to the issuance by the corporation of shares of Common Stock, or
options therefor, (a) in a transaction registered under the Securities Act of
1933, as amended, (b) in a merger or other similar transaction to acquire
another operating business, (c) to employees, officers or directors of the
corporation pursuant to stock purchase or stock option plans or other
arrangements approved by the Board of Directors or (d) in an amount (which
amount shall not include shares of Common Stock issued pursuant to clauses (a),
(b) and (c) above) per annum not to exceed 1% of the corporation's outstanding
Common Stock provided that the price per share of such Common Stock shall be no
less than the fair market value of the Common Stock as determined by the Board
of Directors at the time of issuance.
13. Repurchase of Shares. In connection with repurchases by this
corporation of its Common Stock pursuant to agreements with certain of the
holders thereof, Sections 502 and 503 of the California Corporations Code shall
not apply in whole or in part with respect to such repurchases.
ARTICLE IV
A. The liability of the directors of this corporation for monetary damages
shall be
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eliminated to the fullest extent permissible under California law.
B. This corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with the agents, vote of shareholders or disinterested
directors, or otherwise in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.
THREE The foregoing amendment has been approved by the Board of
Directors of said corporation.
FOUR The foregoing amendment was approved by the holders of the
requisite number of shares of said corporation in accordance with Sections 902
and 903 of the General Corporation Law of California; the total number of
outstanding shares of each class entitled to vote with respect to the foregoing
amendment was (i) [21,001,040-Number to be updated at signing date] shares of
Common Stock, (ii) 500,000 shares of Series A Preferred Stock, (iii) 600,000
shares of Series B Preferred Stock, (iii) 500,000 shares of Series C Preferred
Stock, (iv) 467,839 shares of Series D Preferred Stock, and (v) 1,500,000 shares
of Series E Preferred Stock. The number of shares voting in favor of the
foregoing amendment equaled or exceeded the vote required, such required vote
being (A) a majority of the outstanding shares of Common Stock, voting as a
separate class, and (B) a majority of the outstanding shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock, voting together as a
single class.
The undersigned further declare under penalty of perjury under the
laws of the State of California that the matters set forth in this certificate
are true and correct of their own knowledge.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
March 9, 1998.
----------------------------------------
Henry T. Nicholas
President
----------------------------------------
William J. Ruehle
Secretary
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EXHIBIT 3.2
BYLAWS
OF
BROADCOM CORPORATION
(FORMERLY: BROADBAND TELECOM)
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The Board of Directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside California and
the corporation has one or more business offices in California, then the Board
of Directors shall fix and designate a principal business office in California.
1.2 OTHER OFFICES
The Board of Directors may at any time establish branch or subordinate
offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the Board of Directors. In the absence of any
such designation, shareholders meetings shall be held at the principal executive
office of the corporation or any place consented t in writing by all persons
entitled to vote at such meeting, given before or after the meeting and filed
with the Secretary of the corporation.
2.2 ANNUAL MEETING
An annual meeting of shareholders shall be held each year on a date and at
a time designated by the Board of Directors. At that meeting, directors shall be
elected. Any other proper business may be transacted at the annual meeting of
shareholders.
2.3 SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time, subject to
the provisions of Sections 2.4 and 2.5 of these Bylaws, by the board of
Directors, the Chairman of the Board,
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the President or the holders of shares entitled to cast not less than ten
percent (20%) of the votes at that meeting.
If a special meeting is called by anyone other than the Board of Directors
or the President or the Chairman of the Board, then the request shall be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request shall cause notice to be given to the shareholders
entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of
these Bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than thirty-five
(35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after receipt of the request, then
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.
2.4 NOTICE OF SHAREHOLDERS MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these Bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less than
thirty (30)) nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall state the place,
date, and hour of the meeting and (i) in the case of a special meeting, the
general nature of the business to be transacted, and no business other than that
specified in the notice may be transacted, or (ii) in the case of the annual
meeting, those matters which the Board of Directors, at the time of the mailing
of the notice, intends to present for action by the shareholders, but, subject
to the provisions of the next paragraph of this Section 2.4, any proper matter
may be presented at the meeting for such action. The notice of any meeting at
which directors are to be elected shall include the names of nominees intended
at the time of the notice to be presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
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Notice of a shareholders meeting shall be given either personally or by
first-class mail, or, if the corporation has outstanding shares held or record
by five hundred (500) or more persons (determined as provided in Section 605 of
the Code) on the record date for the shareholders meeting, notice may be sent by
third-class mail, or other means of written communication, addressed to the
shareholder at the address of the shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. The notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
other means of written communication.
If any notice (or any report referenced in Article VII of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.
2.6 QUORUM
Unless otherwise provided in the Articles of Incorporation of the
corporation, shares entitled to vote and holding a majority of the voting power,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. The shareholders present at a duly called or held meeting at which
a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by shares
holding at least a majority of the voting power required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented either in
person or by proxy, but no their business may be transacted, except as provided
in the last sentence of the preceding paragraph.
2.7 ADJOURNED MEETING NOTICE
Any shareholders meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the shares entitled to vote and
holding a majority of the voting power, represented in person or by proxy, at
that meeting.
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When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
its time and place are announced at the meeting at which the adjournment is
taken. However, if the adjournment is for more than forty-five (45) days from
the date set for the original meeting or if a new record date for the adjourned
meeting is fixed, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).
Elections for directors and voting on any other matter at a shareholders
meeting need not be by ballot unless a shareholder demands election by ballot at
the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as may e
otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any holder of shares entitled to vote on any matter
may vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or may vote them against the proposal other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the shareholder
is entitled to vote.
The affirmative vote of shares holding a majority of the voting power,
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute at least a majority of the
voting power required to constitute a quorum), shall be the act of the
shareholders, unless the vote of a greater number of voting by classes is
required by the Code or by the Articles of Incorporation.
At a shareholders meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number
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of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect. Notwithstanding the foregoing, at
such time as the corporation becomes a listed corporation (as such term is
defined in Section 301.5 of the California Corporations Code), shareholders
shall no longer be entitled to cumulate their votes for candidates in an
election of directors.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, are as valid as though they had
been taken at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approval shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of
and presence at that meeting, except when the person objects, at the beginning
of the meeting, to the transaction of any business because the meting is not
lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
code to be included in the notice of such meeting but not so included, if such
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of notes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors.
However, a director may be elected at any time to fill any vacancy on the Board
of Directors, provided that it was not created by removal of a director and that
it has not been filled by the directors, by the written consent of shares
holding a majority of the voting power that are entitled to vote for the
election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal
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representative of the shareholder, or their respective proxy holders, may revoke
the consent by a writing received by the Secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction ins which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
Notwithstanding the foregoing, at such time as the corporation becomes a listed
corporation (as such term is defined in Section 301.5 of the California
Corporations Code), shareholders shall no longer be entitled to cumulate their
votes for candidates in an election of directors.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVEN
CONSENTS
In order that the corporation may determine the shareholders entitled to
notice of any meeting or to vote, the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10)
days prior to the date of such meeting nor more than sixty (60) days before any
other action. Shareholders at the close of business on the record date are
entitled to notice and to vote, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders or record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held.
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(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board of Directors has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action by the Board of
Directors has been taken, shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name or other
authorization is placed on the proxy (whether by manual signature, typewriting,
telegraphic or electronic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) the
person who executed the proxy revokes it prior to the time of voting by
delivering a writing to the corporation stating that the proxy is revoked or by
executing a subsequent proxy and presenting it to the meeting or by attendance
at such meeting and voting in person, or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date thereof,
unless otherwise provided in the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed or designed or if any
persons so appointed fail to appear or refuse to act, then the Chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
to appear) at the meeting. The number of inspectors shall be either one (1) or
three (3). If appointed at a meeting on the request of one (1) or more
shareholders or proxies, shares holding a majority of the voting power,
represented in person or by proxy, shall determine whether one (1) or three (3)
inspectors are to be appointed.
The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies, receive totes, ballots or consents, bear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
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tabulate all votes or consents, determine when the polls shall close, determine
the result and do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code, any limitations in the Articles of
Incorporation, and these Bylaws, relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board of Directors may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board of Directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors of the corporation shall be not less
than four (4) nor more than seven (7) (which in no event shall be greater than
two times the stated minimum minus one), and the exact number of directors shall
be four (4) until changed within the limits specified above, by a resolution
amending such exact number, duly adopted by the Board of Directors or by the
shareholders. The minimum and maximum number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the Articles of Incorporation or by an amendment to
this Bylaw duly adopted by vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number or minimum number of directors to a number less than
five (5) cannot be adopted if the votes cast against its adoption at a meeting,
or the shares not consenting in the case of an action by written consent, are
equal to more than sixteen and two-third percent (16-2/3%) of the outstanding
shares entitled to vote thereon.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
At each annual meeting of shareholders, directors shall be elected to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified, except
in the case of the death, resignation, or removal of such a director.
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3.4 REMOVAL
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of shares holding a majority
of the voting power that are entitled to vote on such removal; provided,
however, that unless the entire Board is removed, no individual director may be
removed when the votes cast against such director's removal, or not consenting
in writing to such removal, would be sufficient to elect that director if voted
cumulatively at an election at which the same total number of votes cast were
cast (or, if such action is taken by written consent, all shares entitled to
vote were voted) and the entire number of directors authorized at the same time
of such director's most recent election were then being elected.
3.5 RESIGNATION AND VACANCIES
Any director may resign effective upon giving oral or written notice to
the Chairman of the Board, the President, the Secretary, or the Board of
directors, unless the notice specifies a later time for the effectiveness of
such resignation. If the resignation of a director is effective at a future
time, the Board of Directors may elect a successor to take office when the
resignation becomes effective.
Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, or if the number of directors then in office is less than a
quorum by (i) unanimous written consent of the directors then in office, (ii)
the affirmative vote of a majority of directors then in office at a meeting held
pursuant to notice or waiver of notice, or (iii) a sole remaining director;
however, a vacancy created by the removal of a director by the vote or written
consent of the shareholders or by court order may be filled only by the
affirmative vote of shares holding a majority of the voting power represented
and voting at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the voting power
required to constitute a quorum), or by the unanimous written consent of all
shares entitled to vote thereon. Each director so elected shall hold office
until the next annual meeting of the shareholders and until a successor has been
elected and qualified, or until his or her death, resignation or removal.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the Board of Directors resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court of convicted or a felony,
(iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full number of directors to be elected at
that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent, other than to fill a vacancy created by removal, shall require
the consent of shares holding a majority of the voting power that are entitled
to vote thereon. A director may not be elected by written consent to fill
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a vacancy created by removal except by unanimous consent of all shares entitled
to vote for the election of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the Board of Directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the Board of Directors. In the absence of such a designation ,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the Board of Directors may be held at any place
within or outside the State of California that has been designated in the notice
of the meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.
Members of the Board of Directors may participate in a meeting through the
use of a conference telephone or similar communications equipment, so long as
all directors participating in such meeting can hear one another. Participation
in a meeting pursuant to this paragraph constitutes presence in person at such
meeting.
3.7 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice if
the time and place of such meetings are fixed by the Board of Directors.
3.8 SPECIAL MEETINGS; NOTICE
Subject to the provisions of the following paragraph, special meetings of
the Board of Directors for any purpose or purposes may be called at any time by
the Chairman of the Board, the President, any Vice President, the Secretary or
any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first class mail,
telegram, charges prepaid, or by telecopier, addressed to each director at the
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or by telecopier or telegram, it shall be
delivered personally or by telephone or by telecopier or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. An oral notice given personally or by telephone may be communicated
either to the director or to the person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose of the meeting.
3.9 QUORUM
A majority of the authorized number of directors shall constitute a quorum
of the transaction of business, except to adjourn as provided in Section 3.10 of
these Bylaws. Every act
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or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present is the act of the Board of Directors,
subject to the provisions of Section 310 of the Code (as to the approval of
contracts or transactions in which a director has a direct or indirect material
financial interest), Section 311 of the Code (as to the appointment of
committees), Section 317(a) of the Code (as to the indemnification of
directors), the Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack or notice to such
director. All such waivers, consents, and approval shall be filed with the
corporate records or be made a part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
Board of Directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place.
3.12 NOTICE OF ADJOURNMENT
If the meeting is adjourned for over twenty-four (24) hours, notice of any
adjournment to another time and place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board of Directors
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors. Such action by written consent shall have the same force and
effect as a unanimous vote of the Board of Directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.14 shall not
be construed to preclude any director from serving
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the corporation in any other capacity as an officer, agent, employee, or
otherwise, and receiving compensation for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
If these Bylaws have been approved by the corporation's shareholders in
accordance with the Code, the corporation may, upon the approval of the Board of
Directors alone, make loans of money or property to, or guarantee the
obligations of, any officer of the corporation or of its parent, if any, whether
or not a director, or adopt an employee benefit plan or plans authorizing such
loans or guaranties provided that (i) the Board of Directors determines that
such a loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares of record by 100 or
more persons (determined as provided in Section 605 of the Code) on the date of
approval of the Board of Directors, and (iii) the approval of the Board of
Directors is by a vote sufficient without counting the vote of any interested
director or directors. Notwithstanding the foregoing, the corporation shall have
the power to make loans permitted by the Code.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two (2) or more directors, to serve at the pleasure of the Board
of Directors. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. The appointment of members or alternate members of a
committee requires the vote of a majority of the authorized number of the
directors. Any such committee shall have authority to act in the manner and to
the extent provided in the resolution of the Board of Directors and may have all
the authority of the Board of Directors, except with respect to:
(a) The approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares.
(b) The filling of vacancies of the Board of Directors or of any
committee.
(c) The fixing of compensation of the directors for serving on the
Board of Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new
Bylaws.
(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable.
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<PAGE> 13
(f) A distribution to the shareholders of the corporation, except at
a rate, in a periodic amount or within a price range set forth in the Articles
of Incorporation or determined by the Board of Directors.
(g) The appointment of any other committee of the Board of Directors
or the members thereof.
4.2 MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committee shall be governed by , and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those Bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of the Committees may
also be called by resolution of the Board of Directors, and that notice of
special meetings of committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee. The Board of
Directors may adopt rules for the government of any committee not inconsistent
with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of a corporation shall be a President, a Secretary, a Chief
Financial officer. The corporation may also have, at the discretion of the Board
of Directors, a Chairman of the Board, one or more Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
as may be appointed in accordance with the provisions of Section 5.3 of these
Bylaws. Any number of officers may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 of these Bylaws, shall be
chosen by the Board and serve at the pleasure of the Board of Directors, subject
to the rights, if any, of an officer under any contract of employment.
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<PAGE> 14
5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or may empower the Chairman of the
Board or the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
5.4 REMOVAL OR RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, all officers serve at the pleasure of the Board of Directors and any
officer may be removed, either with or without cause, by the Board of Directors
at any regular or special meeting of the Board of Directors or, except in case
of an officer chosen by the Board of Directors, by any officer upon whom such
power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCY IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed by
these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these Bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman of the Board, if there be such an officer, the
President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
President shall preside over all meetings of the shareholders and, in the
absence or nonexistence of a Chairman of the Board, at all meetings of the Board
of Directors. The President shall have the general powers and duties of
management usually vested in the office of President of a
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<PAGE> 15
corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board of Directors, shall perform all
the duties of the President and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board of Directors, these Bylaws,
the President or the Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive
office of the corporation or other such place as the Board of Directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and dates of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meeting of
shareholders and of the Board of Directors required to be given by law or by
these Bylaws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform other such
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
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<PAGE> 16
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors against expenses (as defined in
Section 317(s) of the Code), judgment, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as defined
in Section 317(a) of the Code), arising by reason of the fact that such person
is or was a director of the corporation. For purposes of this Article VI, a
"director" of the corporation includes any person (i) who is or was a director
of the corporation, (ii) who is or was serving at the request of the corporation
as a director of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees, officers, and agents
(other than directors) against expenses (as defined in Section 317(a) of the
Code), judgements, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an employee,
officer, or agent of the corporation. For purposes of this Article VI, for an
"employee" or "officer" or "agent" of the corporation (other than a director)
includes any person (i) who is or was an employee, officer, or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee, officer, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or (ii) who was an
employee, officer, or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses and attorneys' fees incurred in defending any civil or criminal
action or proceeding for which indemnification is required pursuant to Section
6.1, or if otherwise authorized by the Board of Directors, shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such an amount if it shall ultimately be determined that the indemnified party
is not entitled to be indemnified as authorized in this Article VI.
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<PAGE> 17
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by the Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors, and administrators
of the person.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of that person's status as such, whether or not the
corporation would have the power to indemnify that person against such liability
under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where is
appears:
(1) That it would be inconsistent with the provisions of the
Articles of Incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
6.7 RIGHT TO BRING SUIT
If a claim under this Article VI is not paid in full by the corporation
within 90 days after a written claim has bene received by the corporation
(either because the claim is denied or because no determination is made), the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. The corporation shall be entitled to raise as a defense to any such
action that the claimant has not met the standards of conduct that make it
permissible under the Code for the corporation to indemnify the claimant for the
claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or
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<PAGE> 18
she has met the applicable standard of conduct, if any, nor an actual
determination by the corporation (including the Board of Directors, independent
legal counsel, or its shareholders) that the claimant has not met the applicable
standard of conduct, shall be a defense to such action or create a presumption
for the purposes of such action that the claimant has not met the applicable
standard of conduct.
6.8 INDEMNITY AGREEMENTS
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines and to the extent permitted by applicable law,
greater than, those provided for in this Article VI.
6.9 AMENDMENT, REPEAL OR MODIFICATION
Any amendment, repeal or modification of any provision of this Article VI
shall not adversely affect any right or protection of a director, employee,
officer or agent of the corporation existing at the time of such amendment,
repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the Board of Directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation who held at least one percent (1%) of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names,
addresses, and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, or (ii) obtain from the transfer
agent of the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list (the amount of which charges
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<PAGE> 19
shall be stated to the shareholder by the transfer agent upon request), a list
of the shareholders' names and addresses who are entitled to vote for the
election of the directors, and their shareholdings, as of the most recent record
date for which it has been compiled or as of the date specified by the
shareholder subsequent to the date of demand. The list shall be made available
on or before the later of five (5) business days after the demand is received or
the date specified therein as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection or copying by
any shareholder or holder of a voting trust certificate at any time during usual
business hours upon written demand on the corporation, for a purpose reasonably
related to the holder's interests as a shareholder or holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California, the original or a copy of these Bylaws as amended
to date, which shall be open to inspection by the shareholders at all reasonable
times during business hours. If the principal executive office is outside the
State of California and the corporation has no principal business office in such
state, then it shall, upon the written request of any shareholder, furnish to
such shareholder a copy of these Bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders and the Board of Directors, and committees of the Board of
Directors shall be kept at such place or places as are designated by the Board
of Directors or, in absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form or in any
other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours, for
a purpose reasonably related to such holder's interests as a shareholder or as a
holder of a voting trust certificate. Such inspection by a shareholder or a
holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspections shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
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Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records, and documents of every kind and to inspect
the physical properties of the corporation and each of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The Board of Directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent to the
shareholders at least fifteen (15) (or, if sent by third class mail, thirty-five
(35)) days prior to the annual meeting of shareholders to be held in the next
fiscal year and in the manner specified in Section 2.5 of these Bylaws for
giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year.
A shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of that period. The statements shall be delivered or
mailed to the person making the request within thirty (30) days thereafter. A
copy of the statements shall be kept on file in the principal office of the
corporation for twelve (12) months and it shall be exhibited at all reasonable
times to any shareholder demanding an examination of the statements or a copy
shall be mailed to the shareholder. If the corporation has not sent to the
shareholders its annual report for the last fiscal year, the statements referred
to in the first paragraph of this section 7.6 shall likewise be delivered or
mailed to the shareholder or shareholders within thirty (30) days after the
request.
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The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or Assistant Secretary of this corporation, or
any other person authorized by the Board of Directors or the President or a Vice
President, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or by power of attorney duly executed by such
person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSED OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than with
respect to notice or voting at a shareholders meeting or action by shareholders
by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to
any such action. Only shareholders of record at the close of business on the
record date are entitled to receive the dividend, distribution or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided for in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto or
the sixtieth (60th) day prior to the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCE OF INDEBTEDNESS
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
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8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of or on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATE FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any such shares are fully paid. The Board of
Directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the Chairman of the Board or
the Vice Chairman of the Board or the President or a Vice President and by the
Chief Financial Officer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, certifying the number of shares and the class and series of
shares owned by the shareholder. Any or all of the signatures on the
certificates may be by facsimile.
In case any officer, transfer agent or registrar has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificate for shares
shall be issued to replace a previously issued certificate unless the later is
surrendered to the corporation or its transfer agent or registrar and cancelled
at the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed (as evidenced by
a written affidavit or affirmation of such fact), authorize the issuance of
replacement certificates on such terms and conditions as the Board of Directors
may require; the Board of Directors may require indemnification of the
corporation secured by a bond or other adequate security sufficient to protect
the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
the certificate or the issuance of the replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the code shall govern the construction of these
Bylaws. Without limiting the
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generality of the provision, the singular number includes the plural, the plural
number includes the singular, and the term "person" includes both a corporation
and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New Bylaws may be adopted or these bylaws may be amended or repealed by
the vote or written consent of holders of a majority of outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided by Section 9.1 of
these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a Bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the Board of Directors.
9.3 RECORD OF AMENDMENTS
Whenever an amendment or new Bylaw is adopted, it shall be copied in the
book of minutes with the original Bylaws. If any Bylaw is repealed, the face of
repeal, with the date of the meeting at which the repeal was enacted or written
consent was filed, shall be stated in said book of minutes.
ARTICLE X
INTERPRETATION
Reference in the Bylaws to any provision of the California Corporations
Code shall be deemed to include all amendments thereof.
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<PAGE> 1
EXHIBIT 4.1
CLASS A COMMON STOCK CLASS A COMMON STOCK
[BROADCOM LOGO]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR STATEMENTS
OF THE STATE OF CALIFORNIA RELATING TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 111320 10 7
This certifies that
to the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF
CLASS A COMMON STOCK, $.0001 PAR VALUE, OF
BROADCOM CORPORATION
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
/s/ WILLIAM J. RUEHLE /s/ HENRY T. NICHOLAS
------------------------------- -------------------------------
CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER
AND SECRETARY AND PRESIDENT
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
<PAGE> 2
The Corporation is authorized to issue Class A Common Stock, Class B
Common Stock and Preferred Stock. The Board of Directors of the Corporation has
the authority to fix the number of shares and the designation of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued series of Preferred
Stock.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders thereof as established by the Articles of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any shareholder of the Corporation upon written request and without charge
from the Secretary of the Corporation at the corporate headquarters.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
UNIF TRF MIN ACT -- .............Custodian (until age.........)
(Cust)
....................under Uniform Transfers
(Minor)
to Minors Act..............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
BROBECK, PHLEGER & HARRISON LLP
4675 MacArthur Court, Suite 1000
Newport Beach, California 92660
March 20, 1998
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, California 92618
Re: Registration Statement on Form S-1 for
4,525,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Broadcom Corporation, a California corporation
(the "Company"), in connection with the proposed issuance and sale by the
Company of up to 3,605,000 shares of the Company's Common Stock and the sale by
certain Selling Shareholders of up to 920,000 shares of the Company's Common
Stock (collectively, the "Shares") pursuant to the Company's Registration
Statement on Form S-1 (the "Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have
been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the
category of persons whose consent is required under Section 7 of the Act, the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.
<PAGE> 2
Broadcom Corporation
Page 2
This opinion letter is rendered as of the date first written above and we
disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or
the Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.12
BROADCOM CORPORATION
SPECIAL STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This Special Stock Option Plan is intended to promote the interests
of Broadcom Corporation, a California corporation, by providing eligible persons
in the Corporation's employ or service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to continue in such employ or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the
<PAGE> 2
functions of the Committee and reassume all powers and authority previously
delegated to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.
C. All stock options and direct stock issuances under the Plan shall
be made in compliance with the applicable requirements of Section 25102(f) of
the California Corporations Code so that the qualification of those securities
shall not be required in the State of California.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan shall be limited
solely to the officers, employee members of the Board and highly compensated
employees of the Corporation.
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the grants under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding, and (ii) with respect to stock issuances
under the Stock Issuance Program, which eligible persons are to receive such
stock issuances, the time or times when those issuances are to be made, the
number of shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 2,000,000
shares.
2.
<PAGE> 3
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
3.
<PAGE> 4
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator, but in no event shall such exercise price be less than
eighty-five percent (85%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
4.
<PAGE> 5
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service
for any reason other than death, Disability or Misconduct, then the
Optionee shall have a period of three (3) months following the date of
such cessation of Service during which to exercise each outstanding option
held by such Optionee.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an
outstanding option, then the personal representative of his or her estate
or the person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance shall have a twelve (12)-month
period following the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding with respect to any and all option shares for
which the option is not otherwise at the time exercisable or in which the
Optionee is not otherwise at that time vested.
5.
<PAGE> 6
(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following Optionee's cessation of Service or death
from the limited period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested under the option had the Optionee continued in Service.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
6.
<PAGE> 7
H. WITHHOLDING. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
the Plan shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.
A. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% SHAREHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the exercise price paid shall not be less
than one hundred ten percent (110%) of the Fair Market value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.
III. CHANGE IN CONTROL
A. Each option outstanding under the Plan at the time of a Change in
Control shall NOT become exercisable on an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Change in Control or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Change in Control on the shares for which the option
is not otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting/exercise schedule applicable to those option
shares or (iii) the acceleration of such option is subject to other limitations
imposed by the Plan Administrator at the time of the option grant. However, if
none of the foregoing conditions apply, an outstanding option shall
automatically
7.
<PAGE> 8
accelerate so that such option shall, immediately prior to the effective date of
the Change in Control, become fully exercisable for all of the shares of Common
Stock at the time subject to that option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock.
B. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
C. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control, had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such Change
in Control and (ii) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities shall
remain the same.
D. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options upon the occurrence of a Change in Control,
whether or not those options are to be assumed in the Change in Control.
E. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the option will
automatically accelerate and become immediately exercisable for all the shares
at the time subject to that option should the Optionee's Service terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Change in Control in
which the option is assumed and does not otherwise accelerate. Any option so
accelerated shall remain exercisable for the fully-vested option shares until
the earlier of (i) the expiration of the option term or (ii) the expiration of
the one (1)-year period measured from the effective date of the Involuntary
Termination.
F. The portion of any Incentive Option accelerated in connection
with a Change in Control shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
8.
<PAGE> 9
G. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
9.
<PAGE> 10
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
10.
<PAGE> 11
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or
any Parent or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
11.
<PAGE> 12
3. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
C. First Refusal Rights. Until such time as the Common Stock is
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CHANGE IN CONTROL
A. Upon the occurrence of a Change in Control, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Change in Control or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights
12.
<PAGE> 13
with respect to those shares remain outstanding, to provide that those rights
shall automatically terminate on an accelerated basis, and the shares of Common
Stock subject to those terminated rights shall immediately vest, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
repurchase rights are assigned to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
13.
<PAGE> 14
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price under the Plan by delivering a
full-recourse, interest-bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee in
connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's shareholders. If
such shareholder approval is not obtained within twelve (12) months after the
date of the Board's adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan. Subject
to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the
date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. All options and
unvested stock issuances outstanding at that time under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
14.
<PAGE> 15
B. Options may be granted under the Option Grant Program and shares
may be issued under the Stock Issuance Program which are in each instance in
excess of the number of shares of Common Stock then available for issuance under
the Plan, provided any excess shares actually issued under those programs shall
be held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
15.
<PAGE> 16
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction,
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's shareholders.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMITTEE shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
E. COMMON STOCK shall mean the Corporation's Class A common stock.
F. CORPORATION shall mean Broadcom Corporation, a California corporation,
and any successor corporation to all or substantially all of the assets or
voting stock of Broadcom Corporation which shall by appropriate action adopt the
Plan.
G. DISABILITY shall mean the inability of the Optionee or the Participant
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment and shall be determined by the Plan
Administrator on the basis of such medical evidence as the Plan Administrator
deems warranted under the circumstances.
A-1.
<PAGE> 17
H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem
appropriate.
K. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
A-2.
<PAGE> 18
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of management
to which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonuses
under any corporate-performance based bonus or incentive programs) by more
than fifteen percent (15%) or (C) a relocation of such individual's place
of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected without the individual's
consent.
M. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
O. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
P. OPTION GRANT PROGRAM shall mean the option grant program in effect
under the Plan.
Q. OPTIONEE shall mean any person to whom an option is granted under the
Plan.
R. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
S. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
T. PLAN shall mean the Corporation's Special Stock Option Plan, as set
forth in this document.
U. PLAN ADMINISTRATOR shall mean either the Board or the Committee acting
in its capacity as administrator of the Plan.
A-3.
<PAGE> 19
V. SERVICE shall mean the provision of services to the Corporation (or any
Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee
member of the board of directors or a consultant or independent advisor, except
to the extent otherwise specifically provided in the documents evidencing the
option grant or stock issuance.
W. STOCK EXCHANGE shall mean either the American Stock Exchange or the New
York Stock Exchange.
X. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.
Z. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AA. 10% SHAREHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-4.
<PAGE> 20
BROADCOM CORPORATION
STOCK OPTION AGREEMENT
RECITALS
I. The Board has adopted the Plan for the purpose of retaining the services of
officers, employee members of the Board of directors and selected highly
compensated Employees.
A. Optionee is to render valuable services to the Corporation (or a Parent
or Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation's grant
of an option to Optionee.
B. All capitalized terms in this Agreement shall have the meaning assigned
to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. During Optionee's lifetime, this option
shall be exercisable only by Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
1
<PAGE> 21
(a) Should Optionee cease to remain in Service for any reason
(other than death, Disability or Misconduct) while this option is outstanding,
then Optionee shall have a period of three (3) months (commencing with the date
of such cessation of Service) during which to exercise this option, but in no
event shall this option be exercisable at any time after the Expiration Date.
(b) Should Optionee die while this option is outstanding, then
the personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in accordance with
the laws of inheritance shall have the right to exercise this option. Such right
shall lapse, and this option shall cease to be outstanding, upon the earlier of
(i) the expiration of the twelve (12)-month period measured from the date of
Optionee's death or (ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Disability
while this option is outstanding, then Optionee shall have a period of twelve
(12) months (commencing with the date of such cessation of Service) during which
to exercise this option. In no event shall this option be exercisable at any
time after the Expiration Date.
Note: Exercise of this option on a date later than three (3) months
following cessation of Service due to Disability will result in loss
of favorable Incentive Option treatment, unless such Disability
constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a
Non-Statutory Option upon exercise.
(d) During the limited period of post-Service exercisability,
this option may not be exercised in the aggregate for more than the number of
Option Shares for which this option is, at the time of Optionee's cessation of
Service, exercisable pursuant to the Exercise Schedule specified in the Grant
Notice or the special acceleration provisions of Paragraph 6. Upon the
expiration of such limited exercise period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding for any otherwise
exercisable Option Shares for which the option has not been exercised. To the
extent this option is not exercisable for one or more Option Shares at the time
of Optionee's cessation of Service, this option shall immediately terminate and
cease to be outstanding with respect to those shares.
(e) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain outstanding.
6. OPTION ACCELERATION.
2
<PAGE> 22
(a) In the event of any Change in Control, this option, to the
extent outstanding at the time but not otherwise fully exercisable, shall NOT
become exercisable on an accelerated basis if and to the extent: (i) this option
is assumed by the successor corporation (or parent thereof) in the Change in
Control or (ii) this option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Change in Control on any Option Shares for which this option is not otherwise at
that time exercisable (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Exercise Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice. However, in the
absence of the foregoing conditions, the option shall automatically accelerate
in full so that an outstanding option shall, immediately prior to the effective
date of the Change in Control, become fully exercisable for all of the Option
Shares at the time subject to this option and may be exercised for any or all of
those Option Shares as fully-vested shares of Common Stock.
(b) Immediately following the Change in Control, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Change in
Control.
(c) If this option is assumed in connection with a Change in
Control, then this option shall be appropriately adjusted, immediately after
such Change in Control, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Change in Control
had the option been exercised immediately prior to such Change in Control, and
appropriate adjustments shall also be made to the Exercise Price, provided the
aggregate Exercise Price shall remain the same.
(d) This option may also become exercisable on an accelerated
basis in accordance with the terms and conditions of any special addendum
attached to this Agreement.
(e) This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. SHAREHOLDER RIGHTS. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the recordholder
of the purchased shares.
3
<PAGE> 23
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a
Purchase Agreement for the Option Shares for which the option is
exercised.
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation; or
(B) a promissory note payable to the Corporation,
but only to the extent authorized by the Plan Administrator in
accordance with Paragraph 14.
Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the Exercise
Price may also be paid as follows:
(C) in shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(D) to the extent the option is exercised for
vested Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions (a) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state and
local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) to the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
4
<PAGE> 24
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Purchase Agreement delivered to
the Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other
than Optionee) have the right to exercise this option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of Federal and state
securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee) for
the satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE
OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS
ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE
PURCHASE AGREEMENT.
11. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect
5
<PAGE> 25
to the non-issuance or sale of the Common Stock as to which such approval shall
not have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.
13. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
14. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.
15. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
16. GOVERNING LAW. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
17. SHAREHOLDER APPROVAL. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may be issued under the Plan as last approved by the shareholders, then
this option shall be void with respect to such excess shares, unless shareholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.
18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
6
<PAGE> 26
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.
(b) No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent) the
aggregate Fair Market Value (determined at the Grant Date) of the Common Stock
for which such installment first becomes exercisable hereunder would, when added
to the aggregate value (determined as of the respective date or dates of grant)
of the Common Stock or other securities for which this option or any other
Incentive Options granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand
Dollar ($100,000) limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such calendar year as a
Non-Statutory Option.
(c) Should the exercisability of this option be accelerated
upon a Change in Control, then this option shall qualify for favorable tax
treatment as an Incentive Option only to the extent the aggregate Fair Market
Value (determined at the Grant Date) of the Common Stock for which this option
first becomes exercisable in the calendar year in which the Change in Control
occurs does not, when added to the aggregate value (determined as of the
respective date or dates of grant) of the Common Stock or other securities for
which this option or one or more other Incentive Options granted to Optionee
prior to the Grant Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable during the
same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should the applicable One Hundred Thousand Dollar ($100,000)
limitation be exceeded in the calendar year of such Change in Control, the
option may nevertheless be exercised for the excess shares in such calendar year
as a Non-Statutory Option.
(d) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
7
<PAGE> 27
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction,
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's shareholders.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's Class A common stock.
F. CORPORATION shall mean Broadcom Corporation, a California corporation
and its successors.
G. DISABILITY shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
A-1.
<PAGE> 28
H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
J. EXERCISE PRICE shall mean the exercise price payable per Option Share
as specified in the Grant Notice.
K. EXERCISE SCHEDULE shall mean the schedule specified in the Grant Notice
pursuant to which the option is to become exercisable for the Option Shares in a
series of installments over Optionee's period of Service.
L. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as the price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem
appropriate.
A-2.
<PAGE> 29
N. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.
O. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
P. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive of
all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
T. OPTION SHARES shall mean the number of shares of Common Stock subject
to the option.
U. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. PLAN shall mean the Corporation's Special Stock Option Plan.
X. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.
A-3.
<PAGE> 30
Y. PURCHASE AGREEMENT shall mean the stock purchase agreement in
substantially the form of Exhibit B to the Grant Notice.
Z. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee or a
non-employee member of the board of directors.
AA. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.
BB. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-4.
<PAGE> 31
BROADCOM CORPORATION
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _______ day of _______ 19____ , by and
between Broadcom Corporation, a California corporation, and
___________________________, Optionee under the Corporation's Special Stock
Option Plan.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
I. EXERCISE OF OPTION
1. EXERCISE. Optionee hereby purchases shares of Common Stock (the
"Purchased Shares") pursuant to that certain option (the "Option") granted
Optionee on ____________________, 199__ (the "Grant Date") to purchase up to
_______________ shares of Common Stock under the Plan at the exercise price of
$______ per share (the "Exercise Price").
2. PAYMENT. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment Separate
from Certificate (in the form attached hereto as Exhibit I) with respect to the
Purchased Shares.
3. SHAREHOLDER RIGHTS. Until such time as the Corporation exercises
the First Refusal Right, Optionee (or any successor in interest) shall have all
the rights of a shareholder (including voting, dividend and liquidation rights)
with respect to the Purchased Shares, subject, however, to the transfer
restrictions of Articles B and C.
THE SALE OF THE PURCHASED SHARES HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE
ISSUANCE OF SUCH SHARES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE OF SUCH SHARES IS EXEMPT FROM QUALIFICATION BY
SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE.
THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UNLESS THE SALE IS SO EXEMPT.
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<PAGE> 32
A. SECURITIES LAW COMPLIANCE
1. RESTRICTED SECURITIES. The Purchased Shares have not been
registered under the 1933 Act and are being issued to Optionee in reliance upon
the exemption from the registration requirements of the 1933 Act provided under
SEC Rule 504 for a securities offering not to exceed One Million Dollars
($1,000,000.00). Optionee hereby confirms that Optionee has been informed that
the Purchased Shares are restricted securities under the 1933 Act and may not be
resold or transferred unless the Purchased Shares are first registered under the
Federal securities laws or unless an exemption from such registration is
available. Accordingly, Optionee hereby acknowledges that Optionee is prepared
to hold the Purchased Shares for an indefinite period and that Optionee is aware
that SEC Rule 144 issued under the 1933 Act which exempts certain resales of
unrestricted securities is not presently available to exempt the resale of the
Purchased Shares from the registration requirements of the 1933 Act.
2. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. Optionee hereby
represents and warrants that:
(i) The Purchased Shares are being acquired for investment
purposes only for the Optionee's own account, and not as a nominee or
agent, and not with a view to the resale or distribution of all or any
part of the Purchased Shares. Optionee is prepared to hold the Purchased
Shares for an indefinite period and has no present intention of selling,
granting any participating interest in, or otherwise distributing any of
the Purchased Shares. Optionee does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant a
participating interest in, any of the Purchased Shares.
(ii) Optionee has a preexisting personal or business
relationship with either the Corporation or certain Board members or
officers of the Corporation which is of a nature and duration sufficient
to make Optionee aware of the character, business acumen and general
business and financial circumstances of the Corporation and/or such Board
members or officers. In addition, Optionee has been furnished with, and
has had access to, such information concerning the Corporation's business,
management and financial condition as he or she considers necessary or
appropriate for deciding whether to invest in the Purchased Shares, and
Optionee has had an opportunity to ask questions and receive answers from
the Corporation regarding the terms and conditions of the issuance of the
Purchased Shares.
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<PAGE> 33
(iii) Optionee is able to fend for him or herself in the
transactions contemplated by this Agreement, can bear the economic risk of
investment in the Purchased Shares and has such knowledge and experience
in financial or business matters to be capable of evaluating the merits
and risks of the investment in the Purchased Shares. Optionee is fully
aware of: (i) the speculative nature of the investment in the Purchased
Shares; (ii) the financial risk involved; (iii) the lack of liquidity for
the Purchased Shares and (iv) the transfer restrictions applicable to the
Purchased Shares.
3. RESTRICTIONS ON DISPOSITION OF PURCHASED SHARES. Optionee shall
make no disposition of the Purchased Shares (other than a Permitted Transfer)
unless and until there is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a
written summary of the terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (a) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (b) all appropriate action
necessary for compliance with the registration requirements of the 1933
Act or any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.
(iv) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that the proposed disposition will not result in the contravention of any
transfer restrictions applicable to the Purchased Shares pursuant to the
provisions of the Rules of the California Corporations Commissioner
identified in Paragraph B.4.
The Corporation shall not be required (i) to transfer on its books
any Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
4. RESTRICTIVE LEGENDS. The stock certificates for the Purchased
Shares shall be endorsed with one or more of the following restrictive legends:
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<PAGE> 34
"The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such
Act is not required with respect to such sale or offer."
"The shares represented by this certificate are subject to
certain first refusal rights granted to the Corporation and accordingly
may not be sold, assigned, transferred, encumbered, or in any manner
disposed of except in conformity with the terms of a written agreement
dated , 199 between the Corporation and the registered holder of the
shares (or the predecessor in interest to the shares). A copy of such
agreement is maintained at the Corporation's principal corporate offices."
B. TRANSFER RESTRICTIONS
1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer,
Optionee shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares in contravention of the First Refusal Right or the Market
Stand-Off.
2. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation)
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the First Refusal
Right and (ii) the Market Stand-Off, to the same extent such shares would be so
subject if retained by Optionee.
3. MARKET STAND-OFF.
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off") shall
be in effect for such period of time from and after the effective date of the
final prospectus for the offering as may be requested by the Corporation or such
underwriters. In no event, however, shall such period exceed one hundred eighty
(180) days and the Market Stand-Off shall in all events terminate two (2) years
after the effective date of the Corporation's initial public offering.
4
<PAGE> 35
(b) Owner shall be subject to the Market Stand-Off provided
and only if the officers and directors of the Corporation are also subject to
similar restrictions.
(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares until
the end of the applicable stand-off period.
C. RIGHT OF FIRST REFUSAL
1. GRANT. The Corporation is hereby granted the right of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares. For purposes of this Article D, the term
"transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not
include any Permitted Transfer.
2. NOTICE OF INTENDED DISPOSITION. In the event any Owner of the
Purchased Shares desires to accept a bona fide third-party offer for the
transfer of any or all of such shares (the Purchased Shares subject to such
offer to be hereinafter referred to as the "Target Shares"), Owner shall
promptly (i) deliver to the Corporation written notice (the "Disposition
Notice") of the terms of the offer, including the purchase price and the
identity of the third-party offeror, and (ii) provide satisfactory proof that
the disposition of the Target Shares to such third-party offeror would not be in
contravention of the provisions set forth in Articles B and C.
3. EXERCISE OF THE FIRST REFUSAL RIGHT. The Corporation shall, for a
period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
twenty-five (25)-day exercise period. If such right is exercised with respect to
all the Target Shares, then the Corporation shall effect the repurchase of such
shares, including payment of the purchase price, not more than five (5) business
days after delivery of the Exercise Notice; and at such time the certificates
representing the Target Shares shall be delivered to the Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the
5
<PAGE> 36
Corporation cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made by
an appraiser of recognized standing selected by Owner and the Corporation or, if
they cannot agree on an appraiser within twenty (20) days after the
Corporation's receipt of the Disposition Notice, each shall select an appraiser
of recognized standing and the two (2) appraisers shall designate a third
appraiser of recognized standing, whose appraisal shall be determinative of such
value. The cost of such appraisal shall be shared equally by Owner and the
Corporation. The closing shall then be held on the later of (i) the fifth (5th)
business day following delivery of the Exercise Notice or (ii) the fifth (5th)
business day after such valuation shall have been made.
4. NON-EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the
Exercise Notice is not given to Owner prior to the expiration of the twenty-five
(25)-day exercise period, Owner shall have a period of thirty (30) days
thereafter in which to sell or otherwise dispose of the Target Shares to the
third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
disposition must not be effected in contravention of the provisions of Articles
B and C. The third-party offeror shall acquire the Target Shares free and clear
of the Repurchase Right and the First Refusal Right, but the acquired shares
shall remain subject to the provisions of Article B and Paragraph C.3. In the
event Owner does not effect such sale or disposition of the Target Shares within
the specified thirty (30)-day period, the First Refusal Right shall continue to
be applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses.
5. PARTIAL EXERCISE OF THE FIRST REFUSAL RIGHT. In the event the
Corporation makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within five (5) business days after Owner's receipt of the Exercise
Notice, to effect the sale of the Target Shares pursuant to either of the
following alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph D.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target
Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph D.3.
The First Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.
Failure of Owner to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
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<PAGE> 37
6. RECAPITALIZATION/REORGANIZATION.
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the First Refusal Right,
but only to the extent the Purchased Shares are at the time covered by such
right.
(b) In the event of a Reorganization, the First Refusal Right
shall remain in full force and effect and shall apply to the new capital stock
or other property received in exchange for the Purchased Shares in consummation
of the Reorganization, but only to the extent the Purchased Shares are at the
time covered by such right.
7. LAPSE. The First Refusal Right shall lapse upon the earliest to
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.
D. GENERAL PROVISIONS
1. ASSIGNMENT. The Corporation may assign the First Refusal Right to
any person or entity selected by the Board, including (without limitation) one
or more shareholders of the Corporation.
2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or
in the Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee's Service at any time for any reason, with or
without cause.
3. NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph
to all other parties to this Agreement.
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<PAGE> 38
4. NO WAIVER. The failure of the Corporation in any instance to
exercise the First Refusal Right shall not constitute a waiver of any other
repurchase rights and/or rights of first refusal that may subsequently arise
under the provisions of this Agreement or any other agreement between the
Corporation and Optionee. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
5. CANCELLATION OF SHARES. If the Corporation shall make available,
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
6. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.
7. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the terms of the Plan.
8. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without resort to that
State's conflict-of-laws rules.
9. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees of Optionee's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
8
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
BROADCOM CORPORATION
By:
-------------------------------------
Title:
----------------------------------
Address:
--------------------------------
----------------------------------------
----------------------------------------
OPTIONEE
Address:
--------------------------------
----------------------------------------
9
<PAGE> 40
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms of such Agreement, including (without limitation) the
first refusal rights of the Corporation (or its assigns) with respect to the
Purchased Shares.
----------------------------------------
OPTIONEE'S SPOUSE
Address:
--------------------------------
----------------------------------------
10
<PAGE> 41
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _____________ hereby sell(s), assign(s) and
transfer(s) unto Broadcom Corporation (the "Corporation"), ________ (______)
shares of the Common Stock of the Corporation standing in his or her name on the
books of the Corporation represented by Certificate No.__________ herewith and
do(es) hereby irrevocably constitute and appoint ______________ Attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: _______________
Signature
-------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE> 42
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Purchase Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's Class A common stock.
E. CORPORATION shall mean Broadcom Corporation, a California corporation.
F. DISPOSITION NOTICE shall have the meaning assigned to such term in
Paragraph D.2.
G. EXERCISE NOTICE shall have the meaning assigned to such term in
Paragraph D.3.
H. EXERCISE PRICE shall have the meaning assigned to such term in
Paragraph A.1.
I. FAIR MARKET VALUE of a share of Common Stock on any relevant date,
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.
J. FIRST REFUSAL RIGHT shall mean the right granted to the Corporation in
accordance with Article D.
K. GRANT DATE shall have the meaning assigned to such term in Paragraph
A.1.
L. GRANT NOTICE shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.
M. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
N. MARKET STAND-OFF shall mean the market stand-off restriction specified
in Paragraph C.3.
O. 1933 ACT shall mean the Securities Act of 1933, as amended.
A-1.
<PAGE> 43
P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
Q. OPTION shall have the meaning assigned to such term in Paragraph A.1.
R. OPTION AGREEMENT shall mean all agreements and other documents
evidencing the Option.
S. OPTIONEE shall mean the person to whom the Option is granted under the
Plan.
T. OWNER shall mean Optionee and all subsequent holders of the Purchased
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.
W. PLAN shall mean the Corporation's Special Stock Option Plan.
X. PLAN ADMINISTRATOR shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.
Y. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.
Z. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
AA. REORGANIZATION shall mean any of the following transactions:
(i) a merger or consolidation in which the Corporation is not the
surviving entity,
A-2.
<PAGE> 44
(ii) a sale, transfer or other disposition of all or substantially
all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Corporation is incorporated or to create a holding company structure.
BB. SEC shall mean the Securities and Exchange Commission.
CC. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant.
DD. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
EE. TARGET SHARES shall have the meaning assigned to such term in
Paragraph D.2.
A-3.
<PAGE> 1
EXHIBIT 10.13
As of October 31, 1997
Mr. Henry T. Nicholas
Co-Chairman and Chief Executive Officer
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, California 92618 PRIVILEGED AND CONFIDENTIAL
---------------------------
Re: Purchase of Common Stock of Broadcom Corporation
Dear Henry:
This letter agreement (the "Share Agreement") confirms the terms and
conditions of the purchase this date by Irell & Manella LLP ("I&M") of 150,000
shares of Common Stock (the "Shares") of Broadcom Corporation ("Broadcom"), as
follows:
1. The aggregate purchase price for the Shares is $1,050,000. I&M has
today delivered to Broadcom its check in the amount of $900,000. In payment of
the balance of $150,000, I&M will cancel outstanding fee and cost invoices to
Broadcom in like amount. Broadcom acknowledges and agrees that the foregoing
actions together constitute payment in full for the Shares.
2. Broadcom will promptly deliver to I&M a stock certificate showing
that 150,000 shares of Broadcom Common Stock have been duly issued and
registered this date in the name of "Irell & Manella LLP." Broadcom will pay any
transfer taxes or fees and any other fees or costs associated with the issuance
of the Shares to I&M. The Shares will be duly authorized and issued, fully paid
and non-assessable.
3. I&M will hold the Shares and the proceeds of any sale thereof for its
own account free and clear of any restrictions by or agreements with Broadcom
other than this Share Agreement. The Shares will be freely transferable by I&M
subject only to any applicable restrictions imposed by federal or state
securities laws. I&M agrees to enter into a reasonable "lockup" agreement with
Broadcom's underwriters, for a period not to exceed 180 days and on terms
comparable to those entered into by senior management shareholders and other
investors in Broadcom, in connection with Broadcom's prospective initial public
offering ("IPO").
4. I&M will have no mandatory demand registration rights with respect to
the Shares but may at its option include all or part of the Shares in any future
primary or
<PAGE> 2
Mr. Henry T. Nicholas
As of October 31, 1997
Page 2
secondary registered public offering of Broadcom Common Stock, at parity with
other participating Broadcom investors (subject to customary underwriter
cutbacks). Notwithstanding the foregoing, I&M acknowledges the Broadcom has
granted registration rights to certain of its existing shareholders, which
rights are senior to I&M's rights hereunder. I&M agrees that it will not require
registration of Shares to the extent that such action would prevent Broadcom
from honoring registration requests by holders of such senior registration
rights. If Shares are included in a registration, I&M will share fees and costs
of the registration (and any applicable underwriting commissions) at a per share
rate equal to the lowest per share amount paid by any other participating
shareholder.
5. I&M has a pre-existing business relationship with Broadcom and its
officers and directors and has the requisite knowledge and experience in
financial and business matters to assess the relative merits and inherent risk
of an investment in the Shares. The Shares are being acquired by I&M for
investment purposes and not with a view to any distribution in violation of
federal or applicable state securities laws.
ETHICAL CONSIDERATIONS
Rule 3-300 of the California Rules of Professional Conduct applies to
situations, like the one at hand, in which an attorney acquires an ownership
interest in a client. The rule requires that the terms of the transaction be
fair and reasonable to the client, be fully disclosed and transmitted in writing
to the client, and be understood by the client. It also requires that the client
be advised that it may seek the advice of an independent lawyer of the client's
choice and be given a reasonable opportunity to seek that advice. Finally, it
requires that the client consent to the transaction in writing. A copy of the
text of Rule 3-300 is attached to this letter.
One of the purposes of this letter, therefore, is to comply with the
requirements of Rule 3-300. Accordingly, before signing this agreement, please
review it carefully to make sure you fully understand its terms and are
confident that those terms are fair and reasonable. As we have previously
advised you orally and in writing, we suggest that Broadcom consult with
independent counsel to assist Broadcom in determining whether to accept the
terms of the purchase of the Shares. Broadcom acknowledges that it has been
afforded a reasonable opportunity to consult with independent counsel regarding
this transaction.
Heretofore Werner F. Wolfen, a partner of I&M, has acquired shares of
Broadcom's Series B and Series D Preferred Stock as well as certain other shares
of
<PAGE> 3
Mr. Henry T. Nicholas
As of October 31, 1997
Page 3
Broadcom Common Stock (collectively, the "Existing Shares," and with the Shares,
the "I&M Shares"). A portion of the Existing Shares are held by Mr. Wolfen for
the benefit of other partners of I&M. By its execution below, Broadcom hereby
acknowledges the foregoing economic interests and confirms its consent to
acquisition of the Shares by I&M for the benefit of its partners and of the
Existing Shares by Mr. Wolfen for his benefit and that of the other partners of
I&M. Broadcom also acknowledges that Mr. Wolfen currently serves as a director
of Broadcom.
As we have previously advised you, the ownership interests in Broadcom
held by Mr. Wolfen and I&M create certain potential conflicts of interest.
Specifically, our interests as shareholders of Broadcom might be perceived as
affecting our ability to give impartial, disinterested legal advice. For
example, our advice regarding a given matter might be perceived as being colored
by our determination of the likely upside to equity and attendant risks. While
we would not accept ownership interests in Broadcom if we felt that, by doing
so, we could not continue to adequately represent Broadcom's interests, it is
possible that our economic interest in Broadcom will leave you uncomfortable
with our representation, possibly at an inopportune time. Moreover, we may reach
the conclusion that the existence of our economic interest makes it
inappropriate to advise Broadcom with respect to issues that might arise, thus
requiring it to retain different counsel, possibly at an inopportune moment, to
advise it on such matters. So that we may continue to represent you, we are also
asking Broadcom by your signature below to waive any conflict that has arisen in
the past or that might arise hereafter by virtue of the status of Mr. Wolfen,
I&M and/or the partners of I&M as the holders of the I&M Shares as well as any
equity securities or other ownership interests in Broadcom or any successor
entity that may be acquired upon conversion or exchange of any of the foregoing
or the exercise of any ancillary rights.
If, after careful consideration, you determine that this letter
accurately reflects your understanding of our agreement, please acknowledge your
approval and acceptance of these terms by signing and returning the enclosed
copy of this letter.
Warm regards.
Cordially,
IRELL & MANELLA LLP
By:______________________________
<PAGE> 4
Mr. Henry T. Nicholas
As of October 31, 1997
Page 4
THE UNDERSIGNED HEREBY AGREES THAT THE TERMS AND CONDITIONS SET FORTH IN
THIS LETTER SHALL APPLY AS PROVIDED HEREIN TO THE PURCHASE, HOLDING AND
DISPOSITION OF THE SHARES BY IRELL & MANELLA LLP FOR THE BENEFIT OF ITS
PARTNERS, CONSENTS TO THE ACQUISITION OF THE I&M SHARES, AND WAIVES ANY CONFLICT
OF INTEREST THAT HAS ARISEN IN THE PAST OR THAT MIGHT ARISE HEREAFTER BY VIRTUE
OF THE REPRESENTATION OF BROADCOM BY IRELL & MANELLA LLP WHILE IRELL & MANELLA
LLP OR ITS PARTNERS HOLD ANY OWNERSHIP INTEREST IN BROADCOM.
BY SIGNING THIS AGREEMENT, AND AS FURTHER SET FORTH IN THE ENGAGEMENT
LETTER AGREEMENT AND ATTACHED STANDARD TERMS OF RETENTION BETWEEN THE PARTIES
DATED AS OF JANUARY 1, 1997, THE PARTIES AGREE TO BINDING ARBITRATION OF
DISPUTES, WHETHER AS TO FEES, QUALITY OF SERVICES RENDERED, THE ARBITRABILITY OF
THE DISPUTE, ANY MATTER RELATING TO THE SHARES, OR OTHERWISE, AND GIVE UP THEIR
RESPECTIVE RIGHTS TO A JURY OR COURT TRIAL, AND WAIVE THEIR RESPECTIVE RIGHTS TO
PROCEED UNDER THE ARBITRATION PROVISIONS OF THE STATE BAR ACT, CALIFORNIA
BUSINESS AND PROFESSIONS CODE SS.SS. 6200, ET SEQ. BROADCOM ACKNOWLEDGES THAT IT
HAS BEEN ADVISED BY IRELL & MANELLA LLP, AND HAS BEEN AFFORDED THE REASONABLE
OPPORTUNITY, TO HAVE THIS TRANSACTION AND THIS AGREEMENT REVIEWED BEFORE
EXECUTION BY INDEPENDENT COUNSEL ACTING ON ITS BEHALF.
BROADCOM CORPORATION,
a California corporation
By: ________________________________
Henry T. Nicholas, Co-Chairman
and Chief Executive Officer
<PAGE> 5
California Rules of Professional Conduct
- ----------------------------------------
RULE 3-300. AVOIDING INTERESTS ADVERSE TO A CLIENT
A member shall not enter into a business transaction with a client; or knowingly
acquire an ownership, possessory, security, or other pecuniary interest adverse
to a client, unless each of the following requirements has been satisfied:
(A) The transaction or acquisition and its terms are fair and
reasonable to the client and are fully disclosed and transmitted
in writing to the client in a manner which should reasonably have
been understood by the client; and
(B) The client is advised in writing that the client may seek the
advice of an independent lawyer of the client's choice and is
given a reasonable opportunity to seek that advice; and
(C) The client thereafter consents in writing to the terms of the
transaction or the terms of the acquisition.
<PAGE> 1
EXHIBIT 10.14
As of January 1, 1997
Mr. Henry T. Nicholas
Co-Chairman and Chief Executive Officer
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, California 92618 PRIVILEGED AND CONFIDENTIAL
---------------------------
Re: Engagement of Irell & Manella LLP
Dear Henry:
We thank you for affording us the opportunity of representing Broadcom
Corporation ("Broadcom"). This letter and the attached Standard Terms of
Retention (which are incorporated into this letter by this reference) will serve
to confirm the principal terms of our engagement. Please note that this letter
agreement provides that any disputes between Broadcom and our firm shall be
determined by binding arbitration.
We understand that Broadcom is retaining our firm to act as counsel to
it in connection with corporate, intellectual property and litigation matters as
may arise from time to time. Unless otherwise confirmed in writing, the terms of
this letter and its attachment will govern each matter within the corporate,
intellectual property and litigation areas as to which we are engaged by you. We
will promptly inform you of our time and resources availability to render
requested services.
The hourly rates of our professional staff range (typically on the basis
of seniority) from [*****] to [*****] (in the case of partners and of-counsel),
[*****] to [*****] (in the case of associates) and [*****] to [*****] (in the
case of legal and clerical assistants). I am attaching a summary of the current
hourly rates of those attorneys principally involved in matters for Broadcom. We
will be assisted by other attorneys at the firm, and by other members of our
professional staff, as needed, during the course of our engagement. Our firm's
hourly rates change from time to time, typically as of January 1 of each
calendar year, and the applicable rates will be those in effect at the time the
particular services are rendered.
[*****] Confidential portion has been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
Mr. Henry T. Nicholas
As of January 1, 1997
Page 2
While Werner F. Wolfen continues to serve as a director of or business
adviser to Broadcom, Broadcom will not be charged for his time on legal matters
for the Company.
On significant litigation matters, we will discount our fees for time
billed during the calendar year 1997 by 10% in recognition of the anticipated
volume of work involved.
We will render to Broadcom periodic billings, typically monthly, for
fees. The amounts reflected on our statements are due upon presentation.
At all times I&M reserves the right to charge a premium over the hourly
rates stated above (and to offset any discounts otherwise applicable) for legal
services rendered in connection with a major corporate transaction or an
unusually favorable result in litigation for Broadcom or in connection with a
sale of Broadcom or a merger in which Broadcom is not the survivor or becomes
the subsidiary of another entity. Any premium will be subject to Broadcom's
approval.
In appropriate circumstances we will reduce our fees where we believe we
have been materially inefficient in the use of available personnel resources or
where in our judgment the indicated value of our time spent is not justified by
the work product produced.
I&M will continue to bill Broadcom for all out of pocket and in house
service expenses incurred by it on matters for Broadcom (including without
limitation travel and lodging expenses and trial exhibits). Cost statements will
be rendered monthly and are payable upon presentation. We will ask you to pay
directly the fees and expenses of others, such as jury consultants and expert
witnesses, engaged in your behalf, and you agree to do so.
I&M shall be entitled to suspend or terminate legal services to Broadcom
at any time if any fee or cost statement remains outstanding and unpaid for more
than 60 days.
We are attaching our Standard Terms of Retention, which are an integral
part of our retention agreement and govern this engagement except to the extent
that any provision of the Standard Terms of Retention conflicts with the express
terms of this letter, in which case the terms of this letter shall govern.
Heretofore Werner F. Wolfen, a partner of I&M, has acquired shares of
Broadcom's Series B and Series D Preferred Stock as well as certain other shares
of Broadcom Common Stock (collectively, the "Existing Shares"). A portion of the
<PAGE> 3
Mr. Henry T. Nicholas
As of January 1, 1997
Page 3
Existing Shares are held by Mr. Wolfen for the benefit of other partners of I&M.
By its execution below, Broadcom hereby acknowledges the foregoing economic
interests and confirms its prior consent to acquisition of the Existing Shares
by Mr. Wolfen for his benefit and that of the other partners of I&M. Broadcom
also acknowledges that Mr. Wolfen currently serves as a director of Broadcom.
Please be advised that the ownership interests in Broadcom held by Mr.
Wolfen for his benefit and that of the other partners of I&M create certain
potential conflicts of interest. Specifically, our interests as shareholders of
Broadcom might be perceived as affecting our ability to give impartial,
disinterested legal advice. For example, our advice regarding a given matter
might be perceived as being colored by our determination of the likely upside to
equity and attendant risks. While we would not accept ownership interests in
Broadcom if we felt that, by doing so, we could not continue to adequately
represent Broadcom's interests, it is possible that our economic interest in
Broadcom will leave you uncomfortable with our representation, possibly at an
inopportune time. Moreover, we may reach the conclusion that the existence of
our economic interest makes it inappropriate to advise Broadcom with respect to
issues that might arise, thus requiring it to retain different counsel, possibly
at an inopportune moment, to advise it on such matters. So that we may continue
to represent you, we are also asking Broadcom by your signature below to waive
any conflict that has arisen in the past or that might arise hereafter by virtue
of the status of Mr. Wolfen, I&M and/or the partners of I&M as the holders of
the Existing Shares as well as any equity securities or other ownership
interests in Broadcom or any successor entity that may be acquired upon
conversion or exchange of any of the foregoing or the exercise of any ancillary
rights.
We ask that you take the time to review this letter and the attached
Standard Terms of Retention to ensure that you fully understand the proposed
terms of our engagement and believe that those terms are fair and reasonable. I
would be pleased to answer any questions you might have. However, we suggest
that Broadcom also consult with independent counsel before reaching any
conclusions about our engagement.
BY SIGNING THIS AGREEMENT, AND AS FURTHER SET FORTH IN THE ATTACHED STANDARD
TERMS OF RETENTION, THE PARTIES AGREE TO BINDING ARBITRATION OF DISPUTES,
WHETHER AS TO FEES, QUALITY OF SERVICES RENDERED, THE ARBITRABILITY OF THE
DISPUTE, ANY MATTER RELATING TO THE EXISTING SHARES, OR OTHERWISE, AND GIVE UP
THEIR RESPECTIVE RIGHTS TO A JURY OR COURT TRIAL, AND WAIVE THEIR RESPECTIVE
RIGHTS TO PROCEED UNDER THE ARBITRATION PROVISIONS OF THE STATE BAR ACT,
CALIFORNIA BUSINESS AND PROFESSIONS CODE
<PAGE> 4
Mr. Henry T. Nicholas
As of January 1, 1997
Page 4
ss.ss. 6200, ET SEQ. IF BROADCOM SO DESIRES, WE ENCOURAGE BROADCOM TO HAVE THIS
AGREEMENT REVIEWED BEFORE EXECUTION BY INDEPENDENT COUNSEL ACTING ON ITS BEHALF.
If, after careful consideration, you determine that this letter
accurately reflects your understanding of our agreement, please acknowledge your
approval and acceptance of these terms by signing and returning the enclosed
copy of this letter.
Very truly yours,
IRELL & MANELLA LLP
By: __________________________
THE UNDERSIGNED HEREBY AGREES THAT, EXCEPT AS OTHERWISE CONFIRMED IN
WRITING, THE TERMS AND CONDITIONS SET FORTH IN THIS LETTER AND THE ACCOMPANYING
STANDARD TERMS OF RETENTION SHALL APPLY TO ALL SERVICES RENDERED BY IRELL &
MANELLA LLP ON BEHALF OF THE UNDERSIGNED, CONFIRMS ITS CONSENT TO THE
ACQUISITION OF THE EXISTING SHARES, AND WAIVES ANY CONFLICT OF INTEREST THAT HAS
ARISEN IN THE PAST OR THAT MIGHT ARISE HEREAFTER BY VIRTUE OF THE REPRESENTATION
OF BROADCOM BY IRELL & MANELLA LLP WHILE WERNER F. WOLFEN, IRELL & MANELLA LLP
OR THE PARTNERS OF IRELL & MANELLA LLP HOLD ANY OWNERSHIP INTEREST IN BROADCOM.
BROADCOM ACKNOWLEDGES THAT IRELL & MANELLA LLP HAS RECOMMENDED THAT BROADCOM
HAVE THIS AGREEMENT REVIEWED BEFORE EXECUTION BY INDEPENDENT COUNSEL ACTING IN
ITS BEHALF AND THAT IT HAS HAD A REASONABLE OPPORTUNITY TO DO SO.
BROADCOM CORPORATION,
a California corporation
By: ___________________________
Henry T. Nicholas,
Co-Chairman and
Chief Executive Officer
<PAGE> 5
Standard Current Hourly Rates for I&M Attorneys
Principally Involved in Broadcom Matters
As of January 1, 1997
Partners
[*****]
Senior Counsel
[*****]
Associates
[*****]
[*****] Confidential portion has been filed separately with the Securities and
Exchange Commission.
<PAGE> 6
STANDARD TERMS OF RETENTION
OF IRELL & MANELLA LLP
[*****]
[*****] Confidential portion has been filed separately with the Securities and
Exchange Commission.
<PAGE> 7
(310) 203-7521
As of January 1, 1998
Mr. Henry T. Nicholas
Co-Chairman and Chief Executive Officer
Broadcom Corporation
16251 Laguna Canyon Road
Irvine, California 92618 PRIVILEGED AND CONFIDENTIAL
---------------------------
Re: Amendment to Engagement Agreement of Irell & Manella LLP
Dear Henry:
This letter agreement supplements and amends the Letter Agreement
between Broadcom Corporation ("Broadcom") and Irell & Manella LLP ("I&M") dated
as of January 1, 1997 relating to the terms and conditions applicable to all
legal services rendered by I&M on behalf of Broadcom (the "Engagement
Agreement").
The terms and conditions set forth in the Engagement Agreement are
hereby modified as follows:
1. For services rendered by I&M during the period January 1, 1998
through December 31, 1999, on all matters other than the matter described in
Paragraph 2 hereof, I&M will bill fees to Broadcom at 90% of I&M's standard
billing rates. Fee statements will be rendered monthly. Broadcom agrees to pay
fee and cost statements in cash within 30 days of receipt. To encourage prompt
payment of our fees for services rendered, I&M will accord Broadcom an
additional discount, equal to 11.11% of the stated cash amount due on each fee
statement rendered, if full payment of the statement is made by Broadcom within
45 days of receipt. I&M will have the right to terminate such additional
discount if Broadcom fails to pay fee or cost statements within 45 days of
receipt on three or more occasions. No discount will apply to cost statements.
2. The parties agree that I&M will continue to represent Broadcom in the
case entitled Stanford Telecommunications, Inc. v. Broadcom Corporation, Case
No. C-96-21072 RMW (PVT) ENE, currently pending in the United States District
Court for the Northern District of California (the "Action"). I&M has been
representing Broadcom in the Action, and Broadcom currently owes I&M fees of
[*****] for services
[*****] Confidential portion has been filed separately with the Securities and
Exchange Commission.
<PAGE> 8
Mr. Henry T. Nicholas
As of January 1, 1998
Page 3
rendered through December 31, 1997 as well as costs of [*****] in connection
with the Action. Broadcom will continue to be responsible to pay I&M these
amounts, as well as all future in-house service and out-of-pocket costs (e.g.,
copying, telephone, fax, word processing, travel and lodging, outside experts,
court reporters, videographers, exhibits, etc.) incurred by I&M in connection
with the Action, as provided in the Engagement Agreement. Nothing contained
herein is intended to change or alter any of these obligations.
For legal services provided by I&M with respect to the Action from and
after January 1, 1998, Broadcom will pay I&M a flat fee of [*****] (the "STel
Fee"), payable ratably, at the rate of [*****] per month, over the 18 month
period commencing February 1, 1998, subject to the following:
a. The STel Fee shall be payable in full regardless of any development
or outcome in the Action and shall not be affected or changed by any such
development or outcome, including without limitation any full or partial
settlement of the Action at any time or any outcome that is unfavorable to
Broadcom. If the Action proceeds through an initial trial on the merits, I&M has
estimated that the remaining legal fees incurred through trial at its standard
billing rates would be in excess of [*****].
b. The STel Fee shall not include or be affected by the in-house service
and out-of-pocket costs incurred by I&M in or otherwise associated with the
Action, prompt payment of which costs shall continue to be Broadcom's separate
obligation as provided in the Engagement Agreement.
c. For purposes of this Paragraph 2, the "Action" shall include any
claims or counterclaims against Stanford Telecommunications brought by Broadcom
in Case No. C-96-21072 RMW (PVT) ENE. The STel Fee shall cover I&M's services
associated with representing Broadcom in the Action from January 1, 1998 through
the conclusion of an initial trial in the Action and any ancillary proceedings
in the United States District Court, but shall not cover any services associated
with (i) a second trial or retrial in the Action or any appeals in the Action,
(ii) any new case brought by or against Stanford Telecommunications (a "New
Case"), or (iii) any other litigation not included within the definition of an
"Action." In the event that a second trial, retrial, or appeal occurs in the
Action, that a New Case is brought by or against Stanford Telecommunications, or
that other litigation is brought by or against Broadcom, and the parties agree
that I&M will handle such matter on behalf of Broadcom, I&M shall be separately
compensated by Broadcom for such representation at I&M's then-applicable
standard billing rates unless I&M and Broadcom execute a separate written
agreement setting forth a different compensation arrangement for the
representation.
d. Broadcom shall be free to discharge I&M as its counsel in the Action
at any time (subject to court approval) but such discharge shall not affect
Broadcom's obligation to pay the STel Fee in full as provided above.
[*****] Confidential portion has been filed separately with the Securities and
Exchange Commission.
<PAGE> 9
Mr. Henry T. Nicholas
As of January 1, 1998
Page 4
e. The monthly ratable payments of the STel Fee (the "STel Monthly
Payments") shall be due and payable on the first day of each calendar month and
shall not be subject to any "prompt payment" discounts such as those provided
for other matters in Paragraph 1 hereof. Any STel Monthly Payment not paid
within 30 days after its due date shall bear simple interest at 10% per annum as
provided in the Engagement Agreement, and I&M shall have the right to suspend or
terminate its representation of Broadcom in the Action if any STel Monthly
Payment remains outstanding and unpaid for more than 60 days or if Broadcom is
more than 30 days late in payment of STel Monthly Payments on three or more
occasions.
3. I&M and Broadcom may agree in the future that one or more new matters
will be handled by I&M on a fixed fee basis, in addition to the matter described
in Paragraph 2, in which case the fee discount arrangement described in
Paragraph 1 hereof shall not apply to such new matter. Neither of the parties
will be obligated to enter into any additional fixed fee arrangement, but if the
parties agree to do so they will execute a separate written agreement setting
forth the terms and conditions of the additional fixed fee arrangement. The
terms of any such additional agreement will take into account various
considerations, including, among other things, the estimated time to be incurred
on the new matter, the difference between the agreed fixed fees on any prior
matter and the time actually incurred (or estimated to be incurred) in
connection with any such matter, the overall volume of legal work provided by
Broadcom to I&M, the performance of I&M's Common Stock investment in Broadcom
acquired pursuant to the letter agreement dated as of October 31, 1997, the
availability of I&M professional staff to work on the matter, and competitive
considerations.
4. Broadcom shall not be obligated to obtain any legal services from
I&M.
5. I&M's "standard billing rates" shall mean the firm's standard hourly
billing rates in effect from time to time. Broadcom acknowledges that such rates
are subject to change and typically change as of January 1 of each calendar
year.
6. For services rendered by I&M after December 31, 1999, I&M will bill
fees to Broadcom at I&M's standard billing rates. Fee statements will be
rendered monthly and will be payable in cash upon presentation. To encourage
prompt payment of our fees for services rendered, I&M will accord Broadcom a
discount, equal to 10% of the stated cash amount due on each fee statement
rendered, if full payment of the statement is made by Broadcom within 45 days of
receipt. I&M will have the right to terminate such discount if Broadcom fails to
pay fee or cost statements within 45 days of receipt on three or more occasions.
No discount will apply to cost statements.
<PAGE> 10
Mr. Henry T. Nicholas
As of January 1, 1998
Page 5
The billing arrangement and prompt payment discount set forth in this
Paragraph 6 shall also apply to all statements rendered for time incurred by I&M
on non-litigation matters during the period October 1, 1997 through December 31,
1997 and to all statements rendered for time incurred on litigation matters
during the period December 1, 1997 through December 31, 1997. In light of the
foregoing, the existing 10% discount provided in the Engagement Agreement for
fees on significant litigation matters will be discontinued for time incurred
after November 30, 1997.
7. In all other respects the Engagement Agreement (including without
limitation the Standard Terms of Retention and arbitration provisions that are a
part thereof) shall continue in full force and effect. The continuing terms and
conditions of the Engagement Agreement shall include, among others, the
provisions for reimbursement of costs, prompt payment of fees and costs, and
I&M's right to charge a premium in certain circumstances.
As always, we ask that you take the time to review this letter to ensure
that you fully understand the proposed terms of our engagement and believe that
those terms are fair and reasonable. I would be pleased to answer any questions
you might have. However, as before we also encourage Broadcom to have this
agreement reviewed before execution by independent counsel acting on its behalf.
If, after careful consideration, you determine that this letter
accurately reflects your understanding of our agreement, please acknowledge your
approval and acceptance of these terms by signing and returning the enclosed
copy of this letter.
Very truly yours,
IRELL & MANELLA LLP
By: ________________________________
THE UNDERSIGNED HEREBY AGREES THAT, EXCEPT AS OTHERWISE CONFIRMED IN
WRITING, THE TERMS AND CONDITIONS SET FORTH IN THIS LETTER, IN THE ENGAGEMENT
AGREEMENT (AS MODIFIED HEREBY) AND IN THE STANDARD TERMS OF RETENTION
ACCOMPANYING THE ENGAGEMENT AGREEMENT (AS MODIFIED HEREBY) SHALL APPLY TO ALL
SERVICES RENDERED BY IRELL & MANELLA LLP ON BEHALF OF THE UNDERSIGNED. BROADCOM
ACKNOWLEDGES THAT
<PAGE> 11
Mr. Henry T. Nicholas
As of January 1, 1998
Page 6
IRELL & MANELLA LLP HAS RECOMMENDED THAT BROADCOM HAVE THIS AGREEMENT REVIEWED
BEFORE EXECUTION BY INDEPENDENT COUNSEL ACTING IN ITS BEHALF AND THAT IT HAS HAD
A REASONABLE OPPORTUNITY TO DO SO.
BROADCOM CORPORATION,
a California corporation
By: _________________________________
Henry T. Nicholas,
Co-Chairman and Chief Executive
Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 16, 1998, except for Notes 7 and 9, as to which
the date is March 20, 1998 in Amendment No. 3 to the Registration Statement
(Form S-1 No. 333-45619) and related Prospectus of Broadcom Corporation.
/s/ Ernst & Young LLP
Orange County, California
March 20, 1998
